SIGNIFICANCE OF WORKING CAPITAL MANAGEMENT IN MANUFACTURING COMPANY
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SIGNIFICANCE OF WORKING CAPITAL MANAGEMENT IN MANUFACTURING COMPANY
Chapter one
INTRODUCTION
1.0 Background of the Study
Working capital, or the incremental value of current assets above current obligations, is an important aspect in corporate operations and survival. Its significance stems from the fact that it is the lifeblood of any organisation; without it, an establishment would cease to exist.
As a result, its strategic importance to business survival needs careful management to ensure its ongoing presence and sufficiency.
As much as inefficiency in working capital can lead to a corporate deficit, overinvestment in working capital can be equally destructive, because money that could have been profitably invested elsewhere to yield returns is being held back. It is vitally crucial for an organization’s management to optimise its investment in working capital.
Appropriate sources, corporate working capital requirements, and feasible investment opportunities must all be identified before investing in excess money that may be instantly realised and used to refill the working capital base as needed.
This research article focused on working capital after carefully considering its nature, importance to management, and undeniable position in the finance structure and component, as well as its significance to business survival.
This study uses Nestle Nigeria Plc as a case study and intends to back up its findings with an analysis of three similar companies, Foremost Diaries Ltd., Cadbury Nigeria Plc, and Nigeria Bottling Company Plc, all of which are in the Foods, Beverages, and Tobacco industry.
1.1Statement of the Problem
The deficiencies that require this inquiry are mentioned below:
a. A lack of awareness about the need of working capital management.
b. Management’s inability to recognise and normalise excessive or insufficient investment in working capital.
b. An appropriate understanding of the effects of over or underinvestment in working capital on firm survival.
b. Insufficient understanding of the fundamentals of working capital management.
e.g., ineffective follow-up on the issue impeding effective working capital management and control.
This research study seeks to provide answers to these probing questions after thoroughly analysing the data acquired.
1.2 Research Objectives
Because of the costs associated with both over and underinvestment in working capital, management places a high value on maintaining optimal investment in current assets.
The research aims to analyse the dynamics and modalities of working capital, its importance to business liquidity and survival, and the extent to which it is required by multiple companies in the same industry.
The research also aims to investigate the effects of working capital over trading, or operating with adequate working capital, on business operations. It will also critically evaluate the aspects and variables that influence working capital as a financial term.
The primary goal of this research is to investigate the working capital situation of the food and beverage industries in order to keep management cadre in the firm chosen as a case study in particular and the entire sector in general from identifying concerns.
1.3 Significance of the Research
This study is relevant because it looks at a topic that is crucial for both financial management and organisational survival. It is also relevant because it confirms and improves findings from previous studies conducted by notable researchers.
Similarly, it is significant since it will undoubtedly show both the benefits and bottlenecks associated with working capital management. This would add to existing knowledge while also assisting the management of the chosen company (Nestle Nigeria Plc) in maintaining sufficient working capital.
1.4 Hypothesis formulation.
1. Ho: Working capital management is not important.
H1: Working capital management is critical.
2. Ho: Management is unable to detect and normalise over or under
Invest in working capital.
H1: Management can detect and normalise excess and underinvestment in working capital.
3. Ho: Over or underinvestment in working capital has little impact on firm viability.
H1: Over or underinvestment in working capital has an effect.
about corporate survival.
4. Ho: There are no fundamentals of working capital management.
H1: There are several basic working capital management principles.
5. Ho: That there are no elements militating against effectiveness.
Management and control of working capital.
H1: There are issues that prevent effective working capital management and control.
1.5 RESEARCH QUESTIONS
1. What research questions will be developed to assess the working class’s awareness regarding the use of working capital?
2. Questions will also be raised regarding the usefulness of working capital in the efficient operation of a manufacturing business.
3. Whether excessive or insufficient investment in working capital may be easily identified and normalised.
4. Questions will be asked about if there are any reasons impeding management’s effectiveness in controlling working capital.
5. Also to assess whether there is a potential of acquiring working capital required from the bank via overdraft, commercial papers, Bankers Acceptance, Bills of Exchange, etc.
1.6 SCOPE AND LIMITATIONS.
This research examines the management of working capital in the foods and drinks business, using Nestle Nigeria plc as a case study.
The research covers a five-year span, from 2005 to 2009. As a backup for the evaluation of the secondary case study, firms shall consist of three more companies picked from the food and beverage industry, such as:
FOREMOST DIARIES LTD, CADBURY NIGERIA PLC, and the Nigerian Bottling Company PLC.
The four companies will be considered representative of the industry, particularly in terms of working capital analysis.
This study is limited in scope because it only included four companies as representative of the entire food and beverage industry. The rationale for this decision is a lack of time and financial resources to cover all of the enterprises in the industry.
The research is further limited because management is unable to offer necessary facts, such as the cash budget, which they believe to be too confidential. This confidentiality also applies to other material that is considered “classified”.
1.7 Historical Background of Nestle NIG.PLC
Nestle Nigeria Plc is linked with the Nestle Group, renowned globally for its excellence.
Products include Maggi, Milo, Nutrend, Cereals, Nido, Nescafe, Nestogen, Lactogen, and others.
Nestle Nigeria Plc began small trade operations in Nigeria in 1961, and has since developed into a recognised manufacturing and marketing corporation.
It is a publicly traded corporation listed on the Nigerian Stock Exchange since 1978, with over 9,000 Nigerian shareholders accounting for 60% of the company’s stock. Nestle Ltd of Switzerland owns 40% of the company’s shares.
Nestle Nigeria Plc identifies with Nigeria’s aspirations for economic and social improvement and has made significant investments in all aspects of its operations on a continuing basis.
Nestle Nigeria Plc is in the food industry, and its operations assist the agricultural, industrial, and commercial sectors of the economy. To achieve its objectives, the company relies on a skilled human resource base, employing modern management techniques and a progressive competitive personnel and social policy.
Instead than striving to maximise short-term profit, Nestle Nigeria Plc aims to optimise long-term profitability and so preserve the company’s continuity.
In order to achieve the aforementioned goals, the company has consistently maintained high standards of product quality as well as integrity and efficiency.
Nestle Nigeria Plc receives ongoing technical assistance from Nestle Ltd, Switzerland, particularly in the areas of new improved manufacturing processes and equipment, raw material research and development of new products, constant quality assurance, cutting-edge management techniques, and continuous staff training.
The firm trademark is a household name that increases the appeal and acceptability of the company’s products among consumers, hence contributing to the company’s growth and success.
1.8 Definition of Terms
Within the context of doing the research, here are some words with connotative meanings in relation to working capital management in manufacturing organisations. Some of the words used are defined, such as inventory and economic order quantity.
i. INVENTORY: This refers to the stock of items in the store. It takes the form of raw materials in the process and finished commodities produced by Nestle Nigeria Plc.
ii. ECONOMIC ORDER QUANTITY (EOQ): This is the optimal quantity required in an organisation for efficient production of products and services. The EOQ entails the existence of a needed amount in order to avoid manufacturing delays.
iii. WORKING CAPITAL: The term “working capital” refers to the surplus of current assets over current liabilities. It denotes the extent by which current assets outlast current obligations.
Mathematically, it is described as CA-CL
Where CA = Current Assets.
CL = Current Liabilities.
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