EFFECT OF

WORKING

CAPITAL ON

BUSINESS

PROFITABILITY

(A CASE STUDY OF HOZOPAC NIG. LIMITED. LAGOS. NIGERIA)

BY

……………………………………….

AKP/WRR/BMG/BUS/HND2007/…………

BEING A PROJECT WORK SUBMITED TO THE

DEPARTMENT OF BUSINESS ADMINISTRATION, SCHOOL

OF BUSINESS STUDIES, COLLEGE OF ACCOUNTANCY AND

COMPUTER TECHNOLOGY, IN PARTIAL FULFILMENT FOR

THE AWARD OF HIGHER NATIONAL DIPLOMA (HND) IN

BUSINESS ADMINISTRATION.

NOVEMBER 2009

CERTIFICATION

2

We hereby certify that this research project was carried

out .......................................................AKP/WRR/BMG/BUS/

HND2007/0029) for the award of HIGHER NATIONAL DIPLOMA

CERTIFICATE. Department of Business Administration.

_______________ ________________

DATE

Project supervisor

__________________ ________________

DATE

Centre co-ordinator

DEDICATION

3

This research project is dedicated to the Almighty God for His

ever enduring love, kindness, mercy and grace all through the

course of this programme. Father, I thank and worship you and

give You all the Glory and Honour.

ACKNOWLEDGEMENT

4

I hereby which to Acknowledged the following people that

has made my dream and purpose in life to come through.

First of all, thanks to Almighty God who gave me power

and wisdom, and the grace to be educated and to my

dear One and Only love that gives me Joy, Mrs Ejaita

Otarigho and my dear mother Mrs Roseline S.

Awharevughen who is an encouragement to my life and

my brothers and Sisters Mr Ovoke Awharevughen, Favour

Awharevughen and Miss Faith Awharevughen for their

love towards me in prayer, also my supervisor Mr

Modeme N. who has been a great help to me. My lovely

Register of warri center Mrs Stella Oyabugbe and my late

father Mr Stephen. H. Awharevughen whose Vision for my

life was to be great and useful in life and those many love

ones too numerous to name. My prayer to God Almighty is

that HE should bless you richly in JESUS NAME.

ABSTRACT

This research work analyzes the effect of working capital

management on firm profitability. In accordance with this

5

aim, to consider statistically significant relationships

between firm profitability and the components of cash

conversion cycle at length, a sample consisting of the

company working capital analysis has been included.

Empirical findings showed that accounts receivables

period, inventory period and leverage affect firm

profitability negatively; while growth (in sales) affects firm

profitability positively.

Decisions relating to working capital and short term

financing are referred to as working capital management.

These involve managing the relationship between a firm's

short-term assets and its short-term liabilities. The goal of working

capital management is to ensure that the firm is able to

continue its operations and that it has sufficient cash flow to

satisfy both maturing short-term debt and upcoming

operational expenses.

In this research work, the researcher will consider in

chapter one….the introduction of the study which will in

turn considers the following topics. The background of the

study, the statement of research problem, the objective

6

of the study, significance of the study, the hypothesis and

the structure of the work.

Chapter two focuses on the literature review, this chapter

is where the researcher extract materials from various

books, magazines, news papers and internet resources. In

chapter three, the researcher deals on research methods

while chapter four is data analysis and presentation. The

findings, summary, and conclusion is in chapter five.

CHAPTER ONE

INTRODUCION

1.1 BACKGROUND OF THE STUDY

The concept of Working Capital includes Current Assets and Current

Liabilities. There are two concepts of Working Capital which are Gross and

Net Working Capital.

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1. Gross Working Capital: Gross Working Capital refers to the firm's

investment in Current Assets. Current Assets are the assets, which can be

converted into cash within an accounting year or operating cycle. It

includes cash, short-term securities, debtors (account receivables or book

debts), bills receivables and stock (inventory).

2. Net Working Capital: Net Working Capital refers to the difference

between Current Assets and Current Liabilities are those claims of

outsiders, which are expected to mature for payment within an

accounting year. It includes creditors or accounts payables, bills payables

and outstanding expenses. Net Working Capital can be positive or

negative.

The concept of Gross Working Capital focuses attention on two aspects of

Current Assets' management. They are:

a) Way of optimizing investment in Current Assets.

b) Way of financing current assets.

a. Optimizing investment in Current Assets: Investment in Current

Assets should be just adequate i.e., neither in excess nor deficit because

excess investment increases liquidity but reduces profitability as idle

investment earns nothing and inadequate amount of working capital can

threaten the solvency of the firm because of its inability to meet its

obligation. It is taken into consideration that the Working Capital needs of

the firm may be fluctuating with changing business activities which may

8

cause excess or shortage of Working Capital frequently and prompt

management can control the imbalances.

b. Way of financing Current Assets: This aspect points to the need of

arranging funds to finance Company Assets. It says whenever a need for

working Capital arises; financing arrangement should be made quickly.

The financial manager should have the knowledge of sources of the

working Capital funds as wheel as investment avenues where idle funds

can be temporarily invested.

1.2 STATEMENT OF THE PROBLEM

In looking at the effect of working capital on business profitability,

some of the questions easily come to mind are:

1. what are root causes of working capital on business?

2. what are the major effects on accounts receivable ?

3. what is the nature of relationship between working capital and

capital employed/

4. what steps should be taken to ensure that it effect on the profit of

the firm will not be negative?

5. how can working capital be managed/

6. what make up the working capital cycle?

7. how can debtors be controlled?

1.3 OBJECTIVE OF THE STUDY

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The main objective of the study is to determine the effect of working capital

on business profitability which has to do with…...................................

Maintenance of working capital at appropriate level, and

Availability of ample funds as and when they are needed

To accomplishment of these two objectives, the management has to

consider the composition of current assets pool. The working capital

position sets the various policies in the business with respect to

general operations like purchasing, financing, expansion and dividend

etc,

The subsidiary Objective of Working Capital Management is to provide

adequate support for the smooth functioning of the normal business

operations of a company. This Objective can be sub-divided into 2 parts:-

1.       Liquidity

2.       Profitability

 

1) Liquidity

 The quantum of Investment in Current Assets has to be made in a

manner that it not only meets the needs of the forecasted sales but also

provides a built in cushion in the form of safety stocks to meet

unforeseen contingencies arising out of factors such as delays in arrival of

Raw Material, sudden spurts in demand etc. Consequently, the

investment in current assets for a given level of forecasted sales will be 10

higher if the management follows a conservative attitude than when it

follows an aggressive attitude. Thus, a company following a conservative

approach is subject to a lower degree of risk than the one following an

aggressive approach. Further, in the former situation the high amount of

Investment in Current Assets imparts greater liquidity to the company

than under the latter situation wherein the quantum of investment in

Current Asset is less. This aspect exclusively covers the liquidity

dimension of Working Capital.

 

2) Profitability

 Once we recognize the fact that the total amount of financial resources

at the disposal of a company is limited and these can be put to

alternative uses, the larger the amount of investment in current assets,

the smaller will be the amount available for investment in other profitable

avenues at hand with the company. A conservative approach in respect

of Investment in Current Assets leaves fewer amounts for other

Investments than an aggressive approach does. Further, since the

Current Assets will be more for a given level of Sales forecast under the

conservative approach, the turnover of Current Assets (calculated as ratio

of Net Sales to Current Assets) will be less than what they would be under

the aggressive approach. Even if we assume the same level of Sales

Revenue, operating Profit before Interest and Tax and Net (Operating)

fixed assets, the company following a conservative policy will have a low

percentage of operating profitability as compared to its counter part

following an aggressive approach.

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1.4 SIGNIFICANCE OF THE STUDY

This study is significant because it will produce data on the working

capital management on firm’s profitability useful to:

1. managers and top executives in organized private sector

2. students carry a research work in this same issue.

3. Bankers that deals with such firms

4. Auditors

5. Accountants

6. Financial analyst

7. Stock exchange dealers

8. The staff of the organization

9. Prospective customers of the firm

10. Creditors of such organization

11. Legal practitioners

12. The stakeholders and management staff

1.5 LIMITATIONS OF THE STUDY

There was the limitation of the reluctance of the respondents to

give answers to survey probes.

The Questionnaire method of primary data collection was limited to

the verbal responses of subjects to pre-arrange questions. It also

had limitation that its usefulness depended on the level of

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education of the subjects. There was the limitation of the problem

of memory in remembering past facts. The structured nature of the

questionnaire may compel the respondents to give answers that

they do not fully endorse, There was the limitation of the rigidity of

the research instrument, which diminishes the amount of

information that could be gathered.

There was the limitation that the cost of administering the

questionnaire was very high due to high administrative, personnel

and traveling costs especially when some of the respondents were

initially not on their seats. There was the limitation that the

researcher and the field data collectors were not policemen and so

they could not force some of the respondents if they refuse to give

answers. There was also the limitation of the scarcity of time and

money resources. Let categories the limited as follows:..

Material Procurement

There was a lot constraints as to getting information and materials

for the job. The researcher made series of consultations and visit to

most renowned institutions to acquire the needed information. Most

materials used were very difficult to come by, as there is no library

within the town.

Time Constraints

Combining academic work with job is no doubt a thought provoking

issue, as it has to do with time. Actually, a lot of time was wasted

as the researcher visited the organizations and individuals together

13

with government agencies to obtain valuable information for the

project.

Financial Constraints

The researcher would have obtained more information than what is

obtainable here but due to lack of money to visit some of the firms

and government agencies located a bit farther from the researcher

place of resident.

1.6 HYPOTHESES

It is a conjectural statement of the relationships between two or

more variables. It is testable, tentative problem explanation of the

relationship between two or more variables that create a state of

affairs or phenomenon.

E,C, Osuola (1986 page 48) said hypothesis should always be in

declarative sentence form, and they should relate to them

generally or specially variable to variables.

HYPOTHESIS THUS:

1. Explain observed events in a systematic manner

2. Predict the outcome of events and relationships

3. Systematically summarized existing knowledge.

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In essence, there exist NULL HYPOTHESIS set up only to nullify the

research hypothesis and the ALTERNATIVE HYPOTHESIS for the

purpose of the study. For the efficiency of the study, the hypothesis

is as follows:

NULL HYPOTHESIS (HO)

1. Working capital does not help the business concern in

maintaining the goodwill

2 Working capital does not create an environment of security,

confidence, and overall efficiency in a business

ALTERNATIVE HYPOTHESIS

1. Working capital helps the business concern in maintaining the

goodwill.

2. Working capital creates an environment of security, confidence,

and overall efficiency in a business.

1.7 STRUCTURE OF WORK

This research work is to be organized in five chapters as follows:

1. Introduction

2. Review of Related Literature

3. Research Methods and Procedures

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4. Data presentation and Analysis and

5. Summary, Findings and Conclusion

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 THE SPECTRUM OF WORKING CAPITAL

Cash is most important factor in financial management. Every

activity in an enterprise revolves round the cash.

As because cash is limited in every enterprise and it cannot be

raised as and when one likes it, it is, therefore, desirable that

available cash must be managed properly.

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Every undertaking is desirous of utilizing the available cash most

effectively so as to accomplish the goals of the undertaking, i.e.,

maximization of profits with the minimum of efforts. But

management of cash is not as simple as it might appear. In case,

the undertaking does not keep sufficient cash in hand, it shall not

be in a position to meet the unexpected challenges, which

challenges and cash remains unutilized in the business, it will result

in losses. If heavy amounts are blocked for unforeseen

contingencies the company will not be in a position to carry on its

day to day working efficiently. It is where the real problem of cash

management comes, i.e., how much cash should be set aside for

unexpected challenges and how much for the regular day-to-day

working.

It is really not an easy problem to solve. In fact, no hard and fast

rules can be suggested for the problem. All the financial

management can do in this regard, is to study the past records an

take the necessary decision bearing in mind the present economic

circumstances and the behaviour and practice of the sister concern.

In Hozopac Nigeria Limited, there are two types of assets in each

concern i.e., fixed assets and current assets. Both types of assets

are to be managed efficiently so as to earn maximum profit with

minimum possible investments because maximization of profits is

the prime object of every business.

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Decisions regarding investment in fixed assets are taken through

the capital budgeting process but decision making regarding

management of working capital is a continuous process which

involves control of everyday and flow of financial resources

circulating in the enterprise in one form or the other. The

accomplishment of the prime object-maximization of profits in most

businesses depends largely how their working capital is managed.

Working capital management is considered to involve the

management of current assets, i.e., cash, accounts receivables and

inventory. Unlike the management of fixed assets which may be

arranged in special cases on long-lease basis, the working capital

has no alternative except to arrange them and us them efficiently.

There are certain special problems peculiar to the management of

working capital requiring operational and financial skills of a high

order.

(1) There is a positive correlation between the sale of the product

of the firm and the current assets. An increase in the sale of the

project requires a corresponding increase in current assets. It is,

therefore, indispensable to manage the current assets properly and

efficiently.

(2) More than half of the total capital of the firm is generally

invested in current assets. It means less than half of the capital is

blocked in fixed assets. We pay due attention to the management

of fixed assets in details through the capital budgeting process.

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Management of working capital too, therefore, attracts the

attention of the management.

(3) In emergency (Non availability of funds etc.) fixed assets can be

acquired on lease but there is no alternative for current assets.

Investment in current assets, i.e., inventory or receivable, can in no

way be avoided without sustaining loss.

(4) Working capital needs are more often financed through outside

sources, so it is necessary to utilise them in the best way possible.

In nutshell, Working capital management involves the relationship

between a firm's short-term assets and its short-term liabilities. The

goal of working capital management is to ensure that a firm is able

to continue its operations and that it has sufficient ability to satisfy

both maturing short-term debt and upcoming operational expenses.

The management of working capital involves managing inventories,

accounts receivable and payable, and cash.

2.1 WORKING CAPITAL DEFINED

Working capital means the funds (i.e.; capital) available and used

for day to day operations (i.e.; working) of an enterprise. It consists

broadly of that portion of assets of a business which are used in or

related to its current operations. It refers to funds which are used

during an accounting period to generate a current income of a type

19

which is consistent with major purpose of a firm existence.

2.2 MANAGEMENT OF WORKING CAPITAL

Management adopt a combination of policies and techniques for the

management of working capital. These policies aim at managing

the current assets (generally cash and cash equivalents, inventories

and debtors) and the short term financing, such that cash flows and

returns are acceptable.

Cash management. Identify the cash balance which allows for the

business to meet day to day expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows

for uninterrupted production but reduces the investment in raw

materials - and minimizes reordering costs - and hence increases cash

flow; see Supply chain management; Just In Time (JIT); Economic order

quantity (EOQ); Economic production quantity

Debtors management. Identify the appropriate credit policy, i.e.

credit terms which will attract customers, such that any impact on

cash flows and the cash conversion cycle will be offset by increased

revenue and hence Return on Capital.

Short term financing. Identify the appropriate source of financing,

given the cash conversion cycle: the inventory is ideally financed by

credit granted by the supplier; however, it may be necessary to utilize

a bank loan (or overdraft), or to "convert debtors to cash" through

"factoring".

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Working capital is directly affecting by other management issues, such

as product mix, supply chain design and business model (for example

agent vs. distributor)

2.3 DECISION CRITERIA

By definition, working capital management entails short term

decisions - generally, relating to the next one year period - which

are "reversible". These decisions are therefore not taken on the

same basis as Capital Investment Decisions (NPV or related, as

above) rather they will be based on cash flows and / or profitability.

One measure of cash flow is provided by the cash conversion cycle -

the net number of days from the outlay of cash for raw material to

receiving payment from the customer. As a management tool, this

metric makes explicit the inter-relatedness of decisions relating to

inventories, accounts receivable and payable, and cash. Because this

number effectively corresponds to the time that the firm's cash is tied

up in operations and unavailable for other activities, management

generally aims at a low net count.

In this context, the most useful measure of profitability is Return on

capital (ROC). The result is shown as a percentage, determined by

dividing relevant income for the 12 months by capital employed;

Return on equity (ROE) shows this result for the firm's shareholders.

Firm value is enhanced when, and if, the return on capital, which

21

results from working capital management, exceeds the cost of capital,

which results from capital investment decisions as above. ROC

measures are therefore useful as a management tool, in that they link

short-term policy with long-term decision making.

2.4 MANAGING WORKING CAPITAL

1. Working Capital Cycle

Cash flows in a cycle into, around and out of a business. It is the

business's life blood and every manager's primary task is to help

keep it flowing and to use the cashflow to generate profits. If a

business is operating profitably, then it should, in theory, generate

cash surpluses. If it doesn't generate surpluses, the business will

eventually run out of cash and expire. Click here for more

information about the vital distinction between profits and

cashflow.

The faster a business expands, the more cash it will need for

working capital and investment. The cheapest and best sources of

cash exist as working capital right within business. Good

management of working capital will generate cash will help improve

profits and reduce risks. Bear in mind that the cost of providing

credit to customers and holding stocks can represent a substantial

proportion of a firm's total profits.

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There are two elements in the business cycle that absorb cash -

Inventory (stocks and work-in-progress) and Receivables

(debtors owing you money). The main sources of cash are

Payables (your creditors) and Equity and Loans.

Each component of working capital (namely inventory, receivables

and payables) has two dimensions ........TIME ......... and MONEY.

When it comes to managing working capital - TIME IS MONEY. If

you can get money to move faster around the cycle (e.g. collect

monies due from debtors more quickly) or reduce the amount of

money tied up (e.g. reduce inventory levels relative to sales), the

business will generate more cash or it will need to borrow less

money to fund working capital. As a consequence, you could reduce

the cost of bank interest or you'll have additional free money

available to support additional sales growth or investment.

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Similarly, if you can negotiate improved terms with suppliers e.g.

get longer credit or an increased credit limit, you effectively create

free finance to help fund future sales.

2. Sources of Additional Working Capital

Sources of additional working capital include the following:

← Existing cash reserves

← Profits (when you secure it as cash !)

← Payables (credit from suppliers)

← New equity or loans from shareholders

← Bank overdrafts or lines of credit

← Long-term loans

If you have insufficient working capital and try to increase sales, you

can easily over-stretch the financial resources of the business. This is

called overtrading. Early warning signs include:

← Pressure on existing cash

← Exceptional cash generating activities e.g. offering high discounts

for early cash payment

← Bank overdraft exceeds authorized limit

← Seeking greater overdrafts or lines of credit

← Part-paying suppliers or other creditors

← Paying bills in cash to secure additional supplies

← Management pre-occupation with surviving rather than managing

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← Frequent short-term emergency requests to the bank (to help pay

wages, pending receipt of a cheque).

3. Handling Receivables (Debtors)

Cashflow can be significantly enhanced if the amounts owing to a business are

collected faster. Every business needs to know.... who owes them money.... how

much is owed.... how long it is owing.... for what it is owed.

Late payments erode profits and can lead to

bad debts.

Slow payment has a crippling effect on business, in particular on

small businesses who can least afford it. If you don't manage

debtors, they will begin to manage your business as you will

gradually lose control due to reduced cashflow and, of course, you

could experience an increased incidence of bad debt. The following

measures will help manage your debtors:

1. Have the right mental attitude to the control of credit and make

sure that it gets the priority it deserves.

2. Establish clear credit practices as a matter of company policy.

3. Make sure that these practices are clearly understood by staff,

suppliers and customers.

4. Be professional when accepting new accounts, and especially larger

ones.

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5. Check out each customer thoroughly before you offer credit. Use

credit agencies, bank references, industry sources etc.

6. Establish credit limits for each customer... and stick to them.

7. Continuously review these limits when you suspect tough times are

coming or if operating in a volatile sector.

8. Keep very close to your larger customers.

9. Invoice promptly and clearly.

10. Consider charging penalties on overdue accounts.

11. Consider accepting credit /debit cards as a payment option.

12. Monitor your debtor balances and ageing schedules, and

don't let any debts get too large or too old.

Recognize that the longer someone owes you, the greater the chance

you will never get paid. If the average age of your debtors is getting

longer, or is already very long, you may need to look for the following

possible defects:

← -weak credit judgement

← -poor collection procedures

← -lax enforcement of credit terms

← -slow issue of invoices or statements

← -errors in invoices or statements

← -customer dissatisfaction.

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Debtors due over 90 days (unless within agreed credit terms) should

generally demand immediate attention. Look for the warning signs of a

future bad debt. For example.........

← longer credit terms taken with approval, particularly for smaller orders

← use of post-dated checks by debtors who normally settle within agreed

terms evidence of customers switching to additional suppliers for the

same goods. New customers who are reluctant to give credit references

← receiving part payments from debtors.

Profits only come from paid sales.

The act of collecting money is one which most people dislike for

many reasons and therefore put on the long finger because they

convince themselves there is something more urgent or important that

demand their attention now. There is nothing more important

than getting paid for your product or service. A customer who

does not pay is not a customer. Here are a few ideas that may

help you in collecting money from debtors:

← Develop appropriate procedures for handling late payments.

← Track and pursue late payers.

← Get external help if your own efforts fail.

← Don't feel guilty asking for money.... its yours and you are entitled to

it.

← Make that call now. And keep asking until you get some

satisfaction.

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← In difficult circumstances, take what you can now and agree terms

for the remainder. It lessens the problem.

← When asking for your money, be hard on the issue - but soft on the

person. Don't give the debtor any excuses for not paying.

← Make it your objective is to get the money - not to score points or

get even.

4. Managing Payables (Creditors)

Creditors are a vital part of effective cash management and should

be managed carefully to enhance the cash position.

Purchasing initiates cash outflows and an over-zealous purchasing

function can create liquidity problems. Consider the following:

Who authorizes purchasing in your company - is it tightly managed

or spread among a number of (junior) people?

Are purchase quantities geared to demand forecasts?

Do you use order quantities which take account of stock-holding

and purchasing costs?

Do you know the cost to the company of carrying stock ?

Do you have alternative sources of supply ? If not, get quotes from

major suppliers and shop around for the best discounts, credit

terms, and reduce dependence on a single supplier.

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How many of your suppliers have a returns policy ?

Are you in a position to pass on cost increases quickly through price

increases to your customers ?

If a supplier of goods or services lets you down can you charge

back the cost of the delay ?

Can you arrange (with confidence !) to have delivery of supplies

staggered or on a just-in-time basis ?

5. Inventory Management

Managing inventory is a juggling act. Excessive stocks can place a

heavy burden on the cash resources of a business. Insufficient

stocks can result in lost sales, delays for customers etc.

The key is to know how quickly your overall stock is moving or, put

another way, how long each item of stock sit on shelves before

being sold. Obviously, average stock-holding periods will be

influenced by the nature of the business. For example, a fresh

vegetable shop might turn over its entire stock every few days

while a motor factor would be much slower as it may carry a wide

range of rarely-used spare parts in case somebody needs them.

Nowadays, many large manufacturers operate on a just-in-time (JIT)

basis whereby all the components to be assembled on a particular

today, arrive at the factory early that morning, no earlier - no later.

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This helps to minimize manufacturing costs as JIT stocks take up

little space, minimize stock-holding and virtually eliminate the risks

of obsolete or damaged stock. Because JIT manufacturers hold

stock for a very short time, they are able to conserve substantial

cash. JIT is a good model to strive for as it embraces all the

principles of prudent stock management.

The key issue for a business is to identify the fast and slow stock

movers with the objectives of establishing optimum stock levels for

each category and, thereby, minimize the cash tied up in stocks.

Factors to be considered when determining optimum stock levels

include:

← What are the projected sales of each product?

← How widely available are raw materials, components etc.?

← How long does it take for delivery by suppliers?

← Can you remove slow movers from your product range without

compromising best sellers?

Remember that stock sitting on shelves for long periods of time ties

up money which is not working for you. For better stock control, try

the following:

←Review the effectiveness of existing purchasing and inventory

systems.

←Know the stock turn for all major items of inventory.

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←Apply tight controls to the significant few items and simplify

controls for the trivial many.

←Sell off outdated or slow moving merchandise - it gets more

difficult to sell the longer you keep it.

←Consider having part of your product outsourced to another

manufacturer rather than make it yourself.

←Review your security procedures to ensure that no stock "is going

out the back door "

6. Key Working Capital Ratios

The following, easily calculated, ratios are important measures of working capital

utilization.

Ratio Formulae Result Interpretation

Stock

Turnover

(in days)

Average

Stock * 365/

Cost of

Goods Sold

= x

days On average, you turn

over the value of your

entire stock every x

days. You may need to

break this down into

product groups for

effective stock

management.

Obsolete stock, slow

moving lines will extend

overall stock turnover

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days. Faster production,

fewer product lines, just

in time ordering will

reduce average days.

Receivables

Ratio

(in days)

Debtors *

365/

Sales

= x

days

It take you on average x

days to collect monies

due to you. If your

official credit terms are

45 day and it takes you

65 days... why ?

One or more large or

slow debts can drag out

the average days.

Effective debtor

management will

minimize the days.

Payables

Ratio

(in days)

Creditors *

365/

Cost of Sales

(or

Purchases)

= x

days On average, you pay

your suppliers every x

days. If you negotiate

better credit terms this

will increase. If you pay

earlier, say, to get a

discount this will

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decline. If you simply

defer paying your

suppliers (without

agreement) this will also

increase - but your

reputation, the quality

of service and any

flexibility provided by

your suppliers may

suffer.

Current

Ratio

Total Current

Assets/

Total Current

Liabilities

= x

times Current Assets are

assets that you can

readily turn in to cash or

will do so within 12

months in the course of

business. Current

Liabilities are amount

you are due to pay

within the coming 12

months. For example,

1.5 times means that

you should be able to

lay your hands on $1.50

for every $1.00 you owe.

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Less than 1 times e.g.

0.75 means that you

could have liquidity

problems and be under

pressure to generate

sufficient cash to meet

oncoming demands.

Quick Ratio

(Total

Current

Assets -

Inventory)/

Total Current

Liabilities

= x

times

Similar to the Current

Ratio but takes account

of the fact that it may

take time to convert

inventory into cash.

Working

Capital

Ratio

(Inventory +

Receivables -

Payables)/

Sales

As %

Sales

A high percentage

means that working

capital needs are high

relative to your sales.

Other working capital measures include the following:

-Bad debts expressed as a percentage of sales.

-Cost of bank loans, lines of credit, invoice discounting etc.

-Debtor concentration - degree of dependency on a limited number of

customers.

34

Once ratios have been established for your business, it is important to

track them over time and to compare them with ratios for other

comparable businesses or industry sectors.

2.5 HOW TO CALCULATE CAPITAL NEEDS

If you have traditionally based your cash projections on gut instinct

and seat-of-the-pants estimates, chances are that you have come up

short when your company could least afford it. To prevent this crisis-

to-crisis method of financial management, Schechter says, try

bringing some science to the critical task of projecting your

company's capital requirements. The approach outlined here uses

information from your company's financial statements:

* Determine your collection period. For simplicity's sake, assume that

your annual sales are N365,000. Dividing this figure by the number of

days in the year gives average daily sales of N1,000. If your accounts

receivable balance is N60,000, you have a collection period of 60

days.

* Perform a similar calculation for inventory. Suppose your cost of

goods sold is N220,000. Dividing this by 365 gives daily costs of

about N600. If your inventory is N27,000, then you have 45 days of

inventory on hand.

Now proceed to accounts payable. Assume you have annual

purchases of inventory and raw materials of N182,000 per year.

Divide this by 365 days, and you have purchases of approximately

35

$500 per day. If your accounts payable are $16,000, you have an

accounts payable period (N16,000 divided by N500) of 32 days.

This means it takes about a month to pay your bills.

* The next step is to take the total of accounts receivable and

inventory days (in this case, 105 days) and subtract from this the

accounts payable period (32 days), leaving a net of 73 days.

"With this process, you've calculated the company's trade cycle,"

Schechter says. "The purpose is to figure how much working capital

the company requires, and that's what it does.

"Assume your annual cash needs (sales minus profits minus such

non-cash charges as depreciation) are N340,000 a year. Because

the company's 73-day business cycle is about 20 percent of a year,

you need about 20 percent of N340,000, or N68,000 in working

capital credit. While this can be reduced by existing lines of credit

or by profits plowed back into the business, it's a good estimate of

the company's cash requirements."

This simplified calculation can be fine-tuned for your company by

developing more detailed information on cash flow. This is usually

done on a monthly basis, since most businesses collect from

customers and pay suppliers monthly.

The cash-flow forecast should be comprehensive, and it should

encompass cash sources and outlays, including revenues, proceeds

36

from the sales of surplus fixed assets, disbursements for new

equipment, income-tax payments, loan payments, dividends or

withdrawals, and deposits on merchandise for future delivery.

Cash receipts and disbursements do not always balance out. Large

cash inflows come shortly after customers are billed. Large cash

payments must be made to build inventory, buy equipment, or pay

taxes.

Capital-planning calculations, says accountant Schechter, "bring

into sharper focus the company's cash needs, taking some of the

guesswork out of the borrowing process. And they help convince

bankers that you not only need loans but will be in position to repay

them."

CHAPTER THREE

RESEARCH METHODS AND PROCEDURES

3.1 RESEARCH DESIGN

The research method selected for the study is a combination of a

survey and an industrial study. The survey research method is

described hereunder that:

37

(i) It is a design in which primary data is gathered from members of

the sample that represents a specific population;

(ii) It is a design in which a structure and systematic research

instrument like a questionnaire or an interview schedule is utilized

together with the primary data;

(ii) It is a method in which the researcher manipulates no explanatory

variables because they have already occurred and so they cannot

be manipulated;

(iii) Data are got directly from the subjects;

The subjects give the data the natural settings of their workplaces;

(iv) The answers of the respondents are assumed to be largely

unaffected of the content in which they are brought;

(v) The impacts of the confounding factors are “controlled”

statistically; and

(vi) The aim of the research may span from the exploration phenomena

to hypotheses testing (stone 1995).

The survey research method has some merit, which are to be

articulated hereunder: In the survey research method, the sample

of the respondents are selected in such a way as to make it low

due to the utilization of big sample sizes, which results in generally

low sample errors.

The survey research method also has the merit that data collection

takes place in the “natural” settings of the workplace rather than

38

an activated laboratory. Data are got directly from the respondents.

The advantage that the survey yields data that suggests new

hypothesis is very illuminating. There is also the merit that a set of

systematic data collection instruments such as questionnaire

interview schedules and observation gadgets can either be used

alone or in conjunction with other instruments (stone, 1995).

3.2 SAMPLING

Spiegel (1992) observes that sampling theory is a study of the

relationship existing between a population or universe and the

samples drawn from it. The population in this study is from the

senior junior staff of the firms. In order to make conclusions of

sample theory and statistical references to be valid, a sample must

be selected as to be representative of the population

(Spiegel,1992). One way in which a representative sample may be

got, is by the process of stratified random sampling. In this

research work, the technique of simple random sampling is used to

select the sample of 100 respondents from each group of the

personnel, making a total sample size of 200.

The list of all senior and junior staff of the firm is from the personnel

department of the company. The numbers were written on a piece

of paper, put in a basket and the papers were folded to cover the

numbers and one of the pieces of paper was selected at a time

without replacing it and any name corresponding to the number

39

becomes a number of the sample. This method of sampling without

replacement was done until the sample of 100 respondents per

group of personnel was arrived at.

3.3 POPULATION

The population, in this study is the totality of the senior and junior

staff of HOZOPAC NIGERIA LIMITED. LAGOS.

The sample size is 200 and this number of respondents was chosen

from the population. The rationale for studying a sample rather

than the population includes that:

1. Most empirical research work in the social science involves

studying a sample in place of the population.

2. Statistical Laws reveal that statistics composed from the

sample data are usually reasonably accurate.

3. Luckily, it is usually possible to estimate the level of

confidence that can be placed on the results.

We should note that above is only possible if the probability sample

size is large enough.

3.4 DATA COLLECTION

Questionnaire

As earlier stated, the primary data collection instrument in this

study is the questionnaire. In the questionnaire method of primary

data collection, heavy dependence is placed on verbal reports from

40

the subjects to get information on the earnings per share and

standard set.

The questionnaire has a lot of merits. It needs less skill to

administer. Questionnaire can be administered to a big number of

individuals at the same time. Also with a specific research budget,

it is usually possible to cover a broader area. The impersonal nature

of a questionnaire, its structure and standardized wording, its order

of question, its standardized instructions for recording answers

might make one to conclude that it offers some uniformity from one

measurement occasion to another (Selltiz et al, 1976).

Another merit of questionnaire is that subjects may have a bigger

confidence in their anonymity, and thus feel freer to express views

they feel might be disapproved.

Another attribute of the questionnaire that is sometimes, though

not always desirable is that it might place less pressure on the

subjects for immediate response (Selltiz et al, 1976).

The questionnaire also has some demerits. It has noted that for

purpose of giving dependable responses to a questionnaire,

respondents must be considerably educated. Thus one of the

demerits of the usual questionnaire is that it is appropriate only for

with a considerable amount of education. There is also demerit that

subject may be reluctant and unable.

To report on the particular subject matter. Also, if a subject

misinterprets a question or give his or her answer in a batting

manner, there is often a little that can be done to ameliorate the

41

situation. In a questionnaire, the information the researcher gets is

limited to the fixed alternative answer format, when a specific

answer is not available, it can lead to error (Selltiz, 1976).

There is also limitation of memory in reporting on past facts. The

researcher is not a policeman that can compel answers. That is, the

information may not be readily accessible to subject and thus the

subject may be reluctant to put forth enough alternative

information that he or she is only barely conscious of (Selltiz et al,

1996).

In this research project, a structured and undisguised questionnaire

is utilized which is made up of two parts namely, the personal data

section and the section on the data on the actual subject matter of

the work. The questionnaire was undisguised in the sense that the

purpose of the data collection which was to collect primary data for

writing up the researcher’s HND project was made know to the 200

respondents. The questionnaire was structured in the sense the

questions are logically sequenced and are to be asked to the

respondents in the same manner and no follow up questions are to

be allowed. Some of the questions are of the fixed alternative

answer format type.

Ten (10) of the questions have yes or no answers,

Ten (10) of the questions have alternative answer for the

respondents to tick.

42

The structured questionnaire has the merit that it yields data that is

easier to analysis than data produced by an unstructured

questionnaire. Also the structured nature diminishes both

researcher’s and research instrument biases. It however has the

demerit that the rigidity of the research instrument diminishes the

amount of information that could be got.

Interview

The method of communication of the research instrument is by

means of the personal interview. The method has the merit that it

produces a better sample of the population than either mail or the

telephone methods. It also has the merit that it gives a very high

completion and response rates. It has the merit that the interview

has a bigger sensitively misunderstandings by the respondents and

gives a chance for clarification of misunderstood questions. It has

the merit that it is a very feasible method (Selltiz et al, 1976). The

personal interview method has the demerit that it is more costly

than the mail or the telephone methods of communication of a

questionnaire.

Observations

In addition to questionnaire and face-to face interviews,

observation was also carried out. This was to enable the researcher

43

to witness by herself the officers of this firm and to interact with

these people.

3.5 FIELD WORK

The researcher and three other field data collectors did the

fieldwork. The field data collectors were other classmates also

offering the Part-time HND program, who have also offered

research methodology. They had no problem gaining entrance into

the office under consideration since one of them has a friend

working there. They were to be trained by the researcher on how to

greet the respondents and how to tick the questionnaire correctly

and honestly.

3.6 DESCRIPTION OF DATA PRESENTATION AND ANALYSIS

TOOLS

The data presentation tools are simple bar charts, histograms, and

pictorial tables. The most important parts of a table include;

(a) Table numbers

(b) Title of the table

(c) Caption

(d) Stub or the designation of the rows and columns

(e) The body of the table.

(f) The head note or prefatory note or explanatory just before

the title.

44

(g) Source note, which refers to the literally or scientific source of

the table (Mills and Walter 1995)

Anyiwe (1994) has observed that a table has the following merits

over a prose information that;

(f) A table ensure an easy location of the required figure;

(g) Comparisons are easily made utilizing a table than a prose

information;

(h) Patterns or trends within the figures which cannot be

visualized in the prose information can be revealed and better

depicted by a table; and

A table is more concise and takes up a less space than a prose

formation:

The data is to be analysed by means of percentage, cross

tabulation and the chi-square test of population proportions for

testing the two hypothesis. Percentages express the ratio of two

sets of data to a common base of 100. The researcher made us of

the computer program called SPSS (statistical package for social

science) to carry out the computation of the hypothesis testing.

3.7 Limitation of The Study

Research work is subject to one form of limitation or the other,

mine is not an exemption.

It was the initial thought of the researcher that the exercise was

easy but the contrary was the case. As a student, several academic

demands compete with the limited but precious time available.

45

This implies that none of the competing exercise could be

effectively handled without the others being worse off.

This was my situation. Although the time expended was too small

to do justice to the study. The opportunity cost in terms of other

equally important activities forgone or cursorily attended to, was

made.

The researcher faces some embarrassment arising from low-level

educated staff who could not understand the essence of the

research work as this.

46

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1 INTRODUCTION

In the previous chapter, the research methods and

procedures have been handled. In this chapter the data

presentation and analysis are to be done. The data is to

be presented by means of tables, two simple bar charts,

one histogram and one pie chart to make it amenable for

further analysis. By analysis is meant the act of noting

relationship and aggregating the set of variables with

similar attributes and also breaking the unit of their

components (Mills and Walters 1995).

In this research work, the research accepts the contention

of Podsakoff and Dalton (1995) that the factual

47

information from the data can be used as a basis for

reasoning, calculation and discussion.

Apart from the heading above, the other headings in this

chapter includes:

Data Presentation,

Percentage analysis

Cross-tabulated analysis

Hypothesis testing

4.2 DATA PRESENTATION

TABLE1THE SUMMARY OF THE PERSONAL DATA

OF THE RESPONDENTS

48

1

2

3

4

SEXMale

FemaleTotal

Marital StatusMarriedSingleTotal

AGE21-30 years31-40 years41-50 years51-60 years

Total

HIGHEREDUCATIONAL

QUALIFICATIONDIPLOMA

ONDHND

FIRST DEGREESECOND DEGREE

NIMTOTAL

FREQUENCY15050200

13070200

90901010200

103080204020200

Anglessuspendedin degree

1854144363236360

The marital statuses of the 200 respondents it is found that

130 of them are married while 70 of them are single. For

the ages of the 200 respondents they are 21-30 years, 31-

40 years, 51-60 years with frequency of 90 and 10

respectively. For the highest educational qualification of the

200 respondents they are diploma, OND, HND, First Degree,

Second Degree, NIM. and they have frequencies of 10, 30,

80, 20, 40 and 20 respectively.

49

Figure 4.1 below shows the simple bar chart of the data on

the sex of the respondents.

FIGURE 4.1: THE SIMPLE BAR CHART OF THE DATA ON THE SEX OF THE RESPONDENTS

GENDER OF THE RESPONDENTS

TABLE 2. GENDER OF THE RESPONDENTS

Source: from data in table 1 (generated from SPSS)

From figure 4.1 above, it is shown that male respondents

have the modal frequency of 150 of the 200 respondents

while the female respondents have the frequency of 50 of

them.

50

Frequency

percentage

Valid Percent

Cumulative Percent

MAIL 150 75.0 75.0 75.0FEMAL

E50 25.0 25.0 100.0

Total 200 100.0 100.0

160

140

120

100

80

60

40

20

0

-

-

-

-

-

-

-

-

-

MAIL FEMALE

Figure 4.2 below shows the simple bar chart of the data

on the marital statuses of the respondents.

FIGURE 4.2: THE SIMPLE BAR CHART OF THE DATA ON THE MARITAL STATUSES OF THE RESPONDENTS

TABLE 3. MARITAL STATUS OF THE RESPONDENTS

From figure 4.2 above, it is shown that the married

respondents have the modal frequency of 130 out of the

200 respondents while the single respondents have the

frequency of 70 of them.

51

Status frequency

Percentage

Valid Percent

Cumulative Percent

MARRIED 130 65.0 65.0 65.0SINGLE 70 35.0 35.0 100.0Total 200 100.0 100.0

140

120

100

80

60

40

20

0

-

-

-

-

-

-

-

-MARRIED SINGLE

FIGURE 4.3: THE HISTOGRAM OF THE DATA ON THE AGES OF THE RESPONDENTS.

AGES OF THE RESPONDENTS

TABLE 4. AGES OF THE RESPONDENTS

SOURCE: From the data in Table 1.

From figure 4.3 above, it is shown that the age classes

limit are 20.5-30.5 years, 30.5-40.5 years, 40.5-50.5 years

52

020

4060

8010

0

1.0 2.0 3.0 4.0

Std. Dev = 78 Mean = 1.7 N = 200.00

Categories

Frequency

Percentage

ValidPercentag

e

Cumulative Percent

21 TO 30YEARS

90 45.0 45.0 45.0

31 TO 40YEARS

90 45.0 45.0 90.0

41 TO 50YEARS

10 5.0 5.0 95.0

51 TO 60YEARS

10 5.0 5.0 100.0

Total 200 100.0 100.0

TABLE 5. EDUCATIONAL QUALIFICATION OF THE RESPONDENTS

and 50.5-60.5 years with frequencies of 90, 90, 10, and

10 out of 200 respectively. This shows that this is bi-

modal distribution as the age classes of 20.5-30.5 years

and 30. 5-40.5 years have a frequency of 10.

Figure 4.4 below shows the pie chart of the data on the

highest educational qualifications of the 200 respondents.

FIG.4.4 THE PIE CHART OF THE DATA ON THE HIGHEST EDUCATIONAL QUALIFICATIONS OF THE 200 RESPONDENTS

Educational Frequency Percentage Valid Cumulative

53

30%

10%

20%

80%

20%

40%

SECOND DEGREE

OND DIPLOMA

FIRST DEGREE

OND

SECOND DEGREE

HND

level Percentage PercentageDIPLOMA 10 5.0 5.0 5.0

OND 30 15.0 15.0 20.0

HND 80 40.0 40.0 60.0

FIRST DEGREE 20 10.0 10.0 70.0

SECOND DEGREE

40 20.0 20.0 90.0

NIM 20 10.0 10.0 100.0

Total 200 100.0 100.0

SOURCE: from the data in table 1.

From figure 4.4 above, the Highest Educational

Qualifications are Diploma, O.N.D, First Degree, Second

Degree and NIM and the sustained angles in degree is

equal to 180, 540, 1440, 360, 720 and 360 and respectively

at the center of the circle.

54

4.3 CROSS-TABULATED ANALYSIS

Table bellows show the analysis of the statuses of the 200

respondents

TABLE 6. CROSS- TABULATION 1

The above table shows that the total of 100 respondents

(out of 200 said YES. this proved that working capital

helps business organization in maintaining its goodwill.

TABLE 7. Cross-tabulation 2

55

DIPLOMA OND HND

FIRST DEGREE SECOND DEGREE NIM

Total

WORKING CAPITAL HELPS THE BIZ. CONCERN IN MAINTAINING THE GOODWILL

YES NO DON’T KNOW

NOANSWER

Total

61914

-4021100

2

3110

43

2

39

39

22

79

18

39

101991

19

4021200

39

DIPLOMA 10 10 OND 19 19 HND 14 30 47 91

FIRST DEGREE 10 9 19 SECOND DEGREE 40 40 NIM 21 21

Total 104 40 47 9 200

WORKING CAPITAL CREATES AN ENVIRONMENT OF SECURITY, CONFIDENCE AND OVERALL EFFICIENCY IN A BUSINESS,

YES NODON’TKNOW

NOANSWER Total

The above table indicates that working capital creates an

environment of security, confidence and overall efficiency in a

business. 104 respondents out of 200 said yes. While 40

did not agree with the fact.

4.4 HYPOTHESIS TESTING

In attempting to arrive at decisions about the population,

on the basis of sample information it is necessary to make

assumptions or guesses about the population parameter

involved. Such an assumption is called statistical

hypothesis, which may or may not be true. The

procedure, which enables the researcher to design on the

basis, is sample regards whether a hypothesis is true or

not is called test of hypothesis or test of significance.

The null hypothesis asserts that there is no significant

difference between the statistics and the population

parameters and what ever is observed difference is there,

is merely due to fluctuations in sampling from the same

population. Null hypothesis is thereby denoted by the

symbol H0. Any hypothesis, which contradicts the H0, is

called an alternate hypothesis and is denoted by the

symbol H1.

56

The researcher used chi-square analysis.

CHI-SQUARE TEST

The c is one of the simplest and most widely used non-

parametric test in statistical work. It makes no

assumptions about the population being sampled. The

quantity c describes the magnitude of discrepancy

between theory and observation i.e. with the help of c

test we can know whether a given discrepancy between

theory and observation can be attributed to chance or

whether it results from the inadequacy of the theory to fit

the observed facts. If c is zero, it means that the observed

and expected frequencies completely coincide. The

greater the value of c the greater will be the discrepancy

between observed and expected frequencies.

The formula for computing chi-square is –

c =(O-E)2/E

Where,O=Observed frequency

E=Expected or theoretical frequency

4.5 SOFTWARE USED FOR DATA ANALYSIS:

57

For the data analysis and the interpretation, the

researcher has adopted advanced version of SPSS

(statistical package for social science). This application

software has facilitated the researcher to construct the

frequency table, various types of charts and to find out

the valid percentage responses from the sample. By this

automated data analysis it has minimized the

researcher’s time constraints and reduced human error

and give also accurate outlay of information.

Chi-Square Test (1)

WORKING CAPITAL HELPS THE BUSINESS CONCERN IN

MAINTAINING THE GOODWILLObserved

F

ExpectedF

Residual Decision

YESNO DON’TKNOW NOANSWERTotal

10043

39

18 200

50.050.0

50.050.0

50.0 -7.0

-11.0

-32.0

AcceptReject

Reject

Reject

58

Chi-Square Test (2)

WORKING CAPITAL CREATE AN ENVIRONMENT OF SECURITY,CONFIDENCE AND OVERALL EFFICIENCY IN A

BUSINESS.

Residuals

The observed value of the dependent variable minus the

value predicated by the regression equation, for each

case. Large absolute values for the residuals indicate that

the observed values are very different from the predicted

values.

SOURCE: From the questionnaires administered.

The formulated hypothesis that is subject to statistical

test is at 5% level of significance in testing hypothesis,

the calculated value of the test statistics is usually

compared with tables of value. The critical values of the

test statistics serve as criterion value. It afforded the

59

Observed

F

ExpectedF

Residual Decision

YESNO DON’TKNOW NOANSWERTotal

10440

47 9 200

50.050.0

50.0

50.0

54.0 -10.0

-3.0

-41.0

AcceptRejected

Rejected

Rejected

basis for rejecting the null hypothesis is a function of the

value of the tested statistic.

Reject the null hypothesis if the calculated value of the

test statistic is greater than the critical value.

Accept the null hypothesis if the calculated value of the

test statistic is less than the critical value.

TEST STATISTICS

note: df = degree of freedom

4.6 SUMMARY OF RESULT

Level of significance……….0.05

Critical value………………………43.0

Calculated value……………………73.880

From the above analysis, it could be seen that in the first

test, working capital helps the business concern in

60

WORKING CAPITAL HELPS

THE BUSINESS CONCERN IN

MAINTAINING THE

GOODWILL

WORKING CAPITAL CREATE

AN ENVIRONMENT

OF SECURITY,CONFI

DENCE AND OVERALL

EFFICIENCY IN A BUSINESS

Chi-Squaredf

73.880 3

94.120 3

maintaining the goodwill, the calculated value is greater

than the critical value so we reject the hypothesis.

In the second test which state that working capital create

an environment of security, confidence and overall

efficiency in a business , the level of significance is 0.05,

the critical value is 44 while the calculated value from the

test statistics table is 94.120. Looking the data above, it

shows very clear that the calculated value is more greater

than the critical value so we reject the hypothesis.

CHAPTER FIVE

61

FINDINGS, SUMMARY AND CONCLUSION

5.0 INTRODUCTION

In this chapter, the researcher deals with the findings as

effect of working capital on business profitability. The

work is summarized with the conclusion drawn.

5.1 FINDINGS

During the cause of the research, the researcher,

discovered that Working capital management involves the

relationship between a firm's short-term assets and its

short-term liabilities. The goal of working capital

management is to ensure that a firm is able to continue

its operations and that it has sufficient ability to satisfy

both maturing short-term debt and upcoming operational

expenses. The management of working capital involves

managing inventories, accounts receivable and payable,

and cash.

62

In management of working capital, There are two types of

assets in each concern i.e., fixed assets and current

assets. Both types of assets are to be managed efficiently

so as to earn maximum profit with minimum possible

investments because maximization of profits is the prime

object of every business.

5.2 SUMMARY

The concept of Working Capital includes Current Assets

and Current Liabilities. There are two concepts of Working

Capital which are Gross and Net Working Capital.

1. Gross Working Capital: Gross Working Capital refers

to the firm's investment in Current Assets. Current Assets

are the assets, which can be converted into cash within

an accounting year or operating cycle. It includes cash,

short-term securities, debtors (account receivables or

book debts), bills receivables and stock (inventory).

2. Net Working Capital: Net Working Capital refers to

the difference between Current Assets and Current

Liabilities are those claims of outsiders, which are

63

expected to mature for payment within an accounting

year. It includes creditors or accounts payables, bills

payables and outstanding expenses. Net Working Capital

can be positive or negative.

5.3 CONCLUSION

A firm must have adequate working capital, i.e.; as much

as needed the firm. It should be neither excessive nor

inadequate. Both situations are dangerous. Excessive

working capital means the firm has idle funds which earn

no profits for the firm. Inadequate working capital means

the firm does not have sufficient funds for running its

operations. It will be interesting to understand the

relationship between working capital, risk and return. The

basic objective of working capital management is to

manage firms current assets and current liabilities in such

a way that the satisfactory level of working capital is

maintained, i.e.; neither inadequate nor excessive.

Working capital some times is referred to as “circulating

capital”. Operating cycle can be said to be t the heart of

the need for working capital. The flow begins with

conversion of cash into raw materials which are, in turn

64

transformed into work-in-progress and then to finished

goods. With the sale finished goods turn into accounts

receivable, presuming goods are sold as credit. Collection

of receivables brings back the cycle to cash.

It is in this respect that this study finds it worthwhile to address the following questions using time series data for a 31-year period, 1970-2000: (a) what is the nature of relationship between poverty, unemployment and growth in Nigeria? (b) what steps should be taken to ensure that growth is such that brings about decrease in unemployment and poverty in Nigeria?

65

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