Project Topic:
EFFECTIVE WORKING CAPITAL MANAGEMENT (A CASE STUDY OF MARSHAL PAINT AND CHEMICAL LIMTED ENUGU-ENUGU STATE)
CHAPTER ONE
INTRODUCTION
One of the major objectives of most business organization is profitability. However, in financial management, it is generally believed that liquidity is more important than profitability. One of the reasons for this is that most organizations make profits, but do not possess enough or adequate liquid asset to offset current obligations. Inability to make payment as at when due may definitely have serious consequences on the organization. This situation may give rise to a loss of goodwill and furthermore any result to technical insolvency, which may lead the organization to unintended liquidation.
A second reason is that uncertain inherent in these present days economic/business environment threatens the survival of every business, thus making sound liquidity and cash management a necessity points in corporate planning. This claim is substantiated in the recent times by the fact that the importance of management of liquid asset has been gradually and systematically gaining prominence and growth of liquidity management makes it very apparent that no firm can survive without an effective and efficient management of its liquid resources which is the working capital. The working by al standards is been and regarded as the life-wire of any business organization it is particularly important in the daily maintenance and running expenses involving cash for the purpose of this project, the working capital of a firm comprises of the cash balance marketable short-term securities, inventories and accounts receivables. On the other hand, net working capital is the excess of current assets over current liabilities. Therefore, working capital management refers to the efficient administration of the current assets and current liabilities.
The rationale of working capital management is on the realization that current asset holding should be increased to the point where marginal returns or increases in such assets are equal to cost of capital required to finance such additions while current liabilities should as much as possible be used instead of long term debt whenever this reduces the average cost of capital. Current assets characteristically constitute more than half the assets of most business and the size and relative volatility of these assets make it necessary for such assets to be closely monitored. Thus disproportionate amount of time of the financial controller is devoted to the management of working capital.
Finally, efficient management of working capital is important to both large and small firms, especially during this austere period because if the efficiency of managing working capital is not available, no amount of finance provided will transform a financially weak organization performance into a strong and dynamic organization with a remarkable reputation.
1. STATEMENT OF THE PROBLEM
It has been recognized that one of the greatest problem of this present day firms is the lack of effective and efficient management of the resources at their disposal. This problem is worsened considering the present fiscal policy of banning the importation of some essential raw materials; leaving the manufacturing firms with meager source of locally few produced raw materials.
Decisions effecting liquid assets are influenced by an obvious fact and subjective judgment of most companies. The financial controller of a company may have some of the facts of the cost of borrowing from a bank but these fact are only part of the information that he requires. On the other hand, there are also subjective benefits arising from having more cash. the financial manager may decide to buy some insurance against financial liquidity by arranging and paying for a credit agreement committing a bank to end up to an agreed sum.
Despite all these explicit and implicit costs , still in profits liquid assets may not mean storage in profits. According to spacers (1977) “profits may appears satisfactory while operations are claiming financial resources of the business”. Still in the same view, Harthey (1985) said that “profitable firms have been known to the have a considerable cash surplus”.
On this note, the problem is to identify the difficulties many manufacturing firms finds themselves in when they perceive that profit mature to the detriment of running illiquid. This will go a long way to identify the relationship existing between the management of working capital.
1.3 OBJECTIVE OF THE STUDY
It is not uncommon to find a company over-loaded with inventories and other investments when cash is in short supply for payments and other cash commitments. It is equally not uncommon to find some firms heavily over-loaded with idle cash when there are very many profitable investments that could tapped with some of such cash.
On the other hand, over-investment in fixed assets, poor collections on receivables, bad debt and unbalanced or absolutes inventories can qualify transform a profitable company over-trading on creditors cash and bank loan into a company with solvency problems. The concretionary monetary policy by this present military administration and its subsequent effect on the cash squeeze on banks had made it most difficult for firms to obtain short term financing from financial institutions.
According to Mabogunje the restrictive monetary policy introduced to curb inflation by moping up excess liquidity and curb demand in the economy has brought Nigerian private sectors and manufacturing companies face to face with the most important Objective of business. With the reduction of Wain in-cir-by foreign exchange market (FEM), companies are faced with excess stock, which they are unable to dispose of owing to a fall in the consumer demand. The light of the above therefore, it is the general objective or purpose of this research project to do the following: –
1. To find out if the management of Marshal has maintained enough inventory levels paints and chemical company in order to enhanced a growth running of the production process.
2. To examine if the minimum cash has been adequate in the company.
3. To critically examine the credit policy of the company.
4. To investigate if the company has adequate current assets to meet its maturing obligations.
5. To identify the extent to which either the presence of working capital management.
Finally, it is hoped that the results this research study will provide useful information to the management of Marshal paints and chemical company Ltd
1. RESEARCH HYPOTHESIS FORMULATION
Many firms do not recognize the concept of working capital management formally and in practice, no proper attention is given to this concept. The research project is therefore, directed toward finding out whether manufacturing firms that have not been practicing the concept of working management have been loosing profits from this. To enable the researcher carry out this study, the under-listed hypothesis would be empirically tested.
Hoi: Effective working capital management does not improve the performance of manufacturing firm.
Ho2: The management of cash in Marshal paints and chemical company is effective.
Ho3: The inventory control in Marshal paints and chemical company is adequate.
Ho4: The management of account receivable is not efficient in Marshal paints and chemical company Ltd.
1.4 ASSUMPTIONS OF THE STUDY
For the purpose of reducing complexities of facts figures in order to make research to be meaningful and objective, the researcher made the following assumptions:-
1. That marshal paints and chemical company limited production textured paints, gloss, emulsion and liquid detergents.
2. That Marshal paints and chemical company limited and few other paint companies are capable of making up the industrial average.
3. That the Marshal paints and chemical company limited comparable in size with these other firms.
4. That the management of Marshal paints and chemical company limited has been facing some difficulties when they want to increase the needed. Corporate performance without the consideration of efficient and effective capital management.
1.5 SCOPE OF THE STUDY
The variable or purpose of this research work to appraise effective working capital management in paint industry. This study is restricted to Marshal paints and chemical company limited Enugu. For the purpose of industrial average, some other painting firms are used, however, with reference to working capital marked the elements covered and as show here under: –
a. Concepts of cash management.
b. Concepts of short-term marketable securities and
c. Concepts of inventory management.
d. Review or management of account receivables.
It is the intention of the researcher to concentrate proper study on these elements so that their effects would be critically examined on performance position of marshal paints and chemical company limited.
1.6 SIGNIFICANCE
The needed for the study cannot be over-emphasizes as it will be of great significant to readers, business men and women, manufacturers, especially paints factories, corporate bodies and government. The study wills no small measure enlighten the readers on the need, benefit or importance of effective working capital management, especially in paint industry. It will further highlight measures to be taken by corporate bodies such as paint factories in order to attain economic stability, self-reliance investments and required autonomy and flexibility in decision making. It will equally enable some paint factories to realize their mistakes for not attaining the much-needed importance in the concept of effective working capital management. By this research work also, student of accountancy, bank/finance, business administration and management, having gone through this work, will know more about the effectiveness and importance of effective working capital management in industries firms and government agencies. Furthermore, effective working capital management is an important goal to achieved in manufacturing firm for maximum profitability.
The major significance of this study and hence it relevance lies it its aim of educating the readers on the basic and conflicting problems of manufacturing firms in Nigeria. The study will help to highlight some of the incorporate bodies and manufacturing firms, especially paint industries. In the same view, the study enable manufacturing firms to devise to measures necessary for the application of effective working capital management.
Finally, the recommendations and findings for this research project will be a top towards the improvement in effective working capital management in paint industry and other corporate bodies alike.
1.7 LIMITATIONS OF THE STUDY
One of the major constraints was limited time of study considering poor postal services in the country mailed questionnaire took some months before they arrived to their destinations. In addition, office work activities were often foregone for interview purposes. Ignorance whish gave rise to delay on completion and return of small measure to the limitations experienced by the researcher. The biases and prejudices of the respondents to the limitation of this research work.
Some respondents had the feeling that the researcher might have received some greats from the sponsoring institution or the government to carry out the study.
Another major constraint was lack of adequate finance to expand the study by way of visiting all the paint factories in the country.
Furthermore, response from respondents was not encouraging, even through they were assured that information obtained shall be kept secret and used only for the academic purpose. Actually, for obvious competitive reasons, in the paint industry, the company management concealed some official information which would have enhanced the validity, objectivity and reliability of this research work. There were both lots of claims of necessary official protocols and the use of today, come tomorrow syndromes.
These syndromes had a great impact on the researcher considering the light schedule and the distance between the place where the research was conducted and the researchers palace, palace of work.
Finally, the researcher will happily welcome or accept any, error, inadequacy of this research work and any constructive criticism by anyone in the course of going through this research project.
1.9 HISTORICAL BACKGROUND OF MARSHAL PAINTS AND CHEMICAL COMPANY LIMITED.
Marshal paints and chemical company limited was incorporated in 1987 and commenced production of paints in 1993. its capacity as at November 1993 was 10,000 litres of paint daily. In 1995, the installed capacity rose to 25,000 litres of paint daily and the capacity continued to grow and expand until it hit 40,000 liters of paint on a daily production basis in 1997.
It become operational in January 14,1993 when the first litre of paint ploved out of marshal paints. The management had the idea of increasing its exploring products, currently; the company is producing about seven ranges of brands of paint and paint chemicals.
Among these are Marshal taxes, Marshal gloss, Marshal Emulsion, Waterproof textured out and paint dispersary.
As Marshal paints and chemical company limited is growing in capacity, the quality of its number of products was given utmost priority. In 1996, Marshal Paints were certified by the standards organization of Nigeria (SON). This improves quality contributed to their effort in outside market. Where as other paints companies was going out of business, marshal paint is mainly poreasys throughout Nigeria. A clear indication of high quality standard, good marketing strategy and commitment to excellent.
The management had been nursing the idea of diversification, which they believe is an effective weapon for combating economic depression. In view of this the company in 1992 had commissioned a detergent company known as master liquid detergent. The company also undertakes the production of shampoo and other agro chemical like brand improver.
Nonetheless, with a numerical staff strength of over 50 workers, the management believes that their performance over the past years is satisfactory and their products are getting increasing market share.
1.10 ORGANIZATION OF THE STUDY
This research work is divided into five main chapter. One is made of introduction of the project topic, statement of the problem, objective of the study, research hypothesis formulation, assumption of the study, scope of the study, significance of the study, limitations of the study, organization of the study, definition of operational terms and the historical background of marshal paints and chemical company limited, Enugu.
Chapter Two deals with the review of work and literature already done on the topic by others. This chapter deals on the concept of working management, demand of cash management, the concepts of inventory control and finally with review of management of accounts receivables. Chapter three identifies the methods of procedures used in carrying out a research. It deals with the selection of data, collection of data and reliability of data. Chapter four deals with the presentation of data collected and the analysis of data. The hypothesis is also tested in this chapter.
The final chapter summarized the finding of the research. This chapter also offers suggestions in form of recommendations.
1.11 DEFINITION OF OPERATIONAL TERMS
To dismantle the problems or difficulties which may rare their heads as a result of lack of knowledge of the underlying concepts, the researcher wishes to define the following terms of that the subject matter will not suffer from connectional misunderstandings concealed under a semantic smokescreen.
ACID TEST RATIO
“Ratio of a company’s current (excluding property rights) which have a money value”. All items listed on the right hand side of a blank sheet in company accounts in Nigeria.
CASH BUDGET
“A statement of planned cash receipts from sales and other sources, and used of such receipts during the budget period”.
CORPORATION
“Is an entity created by law empowered to own assets, insure liabilities and engage in certain specified activities”. It is an artificial being, intangible, invisible and exists only in eye of the law. It can sued and be sued.
CREDIT LINE
An arrangement where by a bank agrees to consider in a friendly manner a loan application but does not make a firm commitment to lend the found.
CURRENT ASSETS
“Are assets convertible into cash or generally exported to be converted into cash within one year. Included are such items as cash, marketable securities, rotes and accounts receivables from customers, inventories and papered expenses”.
CURRENT LIABILITIES
“Items due and payable within one year”.
CURRENT RATIO
“Is the relationship between the current assets of a firm and its current liabilities or maturing obligations? It is not only a measure of liquidity but also a measure of the margin of safety that management maintains in order to allow for the inevitable unevenness in the flow of funds”.
ILLIQUID
Not easily convertible into the sum of money originally invested.
LIQUIDITY
Ability to convert into cash the liquid assets with the shortest possible time for a price about which there is a little uncertainty.
MANAGEMENT
“Is the direction of an enterprise through plan organization, co-coordinating and controlling its human and material resources towards the achievement of a predetermined objective”.
NEW WORKING CAPITAL
This is the current assets loss the current liabilities.
OVERTRADING
To sales with inadequate working capital especially liquid assets.
PROFITABILITY RATIO
“The firm’s per is measured by its ability to generate profit. Profitability ratio gives the final answers about how effectively the firms is being managed”.
WORKING CAPITAL
“Working capital is the current asset of the firms which include cash, marketable, securities, account receivables and inventories”.
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