Management of Working Capital Project

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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The competitiveness of global manufacturing industries has evolved to

the point where attractive returns are no longer guaranteed from their

operations. In fact, the staff reduction and technical advancement

reduction can easily be traceable to unattractive returns.

A way out of this phenomenon is the improvement of returns on capital

employed (ROCE) and cash flows by focusing on component of

capital employed that is tied up in working capital; inventory,

receivables and payables.

Organizations now pay more attention to the effect of returns and risks

on the assets: Current and Fixed assets. As well known, that the

decision to finance any of these assets rest on the management of the

organisation and in making decision on finance, the management

must balance the requirement for higher returns by using short-term

debt to finance current asset against risks of illiquidity that can result in

insolvency.

According to Olare (1997), it is essential that the investment in working

capital is effectively and efficiently managed to maintain control of

business cash flows, an investment in working capital must consider

the trade off between liquidity (risk) and profitability.

Business Capital is broadly divided into two groups: Fixed Capital and

Working Capital. Fixed Capital refers to the funds invested in fixed

assets of a firm in the form of land, building, machinery etc. Working

Capital refers to the funds invested in the current assets of a firm such

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as raw materials, work-in-progress, finished goods, receivables, cash

etc. From the viewpoint of manufacturing process, working capital

means that part of capital, which is required to keep the flow ofproduction smooth and continuous.

.

Working Capital, being the lifeblood of any enterprise, its management

becomes a crucial exercise for the Financial Managers of firms. The

need of working capital is directly linked to the growth of the firm. In

the past, only the problems of the management of fixed capital were

given importance in the exercise of financial management. But in the

present scenario, looking to the increasing importance of the working

capital in any business unit, the exercise of management of working

capital has become as much important for a financial manager as the

management of fixed capital.

Some authors go the extent of saying that financial management

means working capital management. Even if this extreme view is

regarded as unacceptable, there is no doubt that a large part of a

financial managers time and energy is used up in attending to the

problems of working capital management.

The exercise of working capital management covers the following

points to be considered:

1.Estimating the working capital requirements.

2.Financing of working capital.

3.Optimum untilisation of working capital

The aim of this research work is to determine the importance of the

management of working management to business. And also the

adverse effect which neglecting of working capital management could

have on the profitability and continual existence of businesses.

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1.2 STATEMENT OF THE PROBLEM

Every organisation whose working capital is effectively managed is

likely to meet its financial obligation as they fall due. On the other

hand, organisation whose working capital is poorly managed is

proves to financial crises when faced with unforeseen situations i.e.

unforeseen expenditure. Therefore, the problems identified with the

management of working capital which the study is giving solutions

to are:

i. The problem associated with how a company should optimize

its working capital

ii. The problem associated with how to determine the adequate

level of investment in working capital

iii. The problem of to balancing of liquidity with profitability

1.3 SIGNIFICANCE OF THE STUDYThe survival and growth of the manufacturing companies had been

of great concern to various people. Several methodologies had

been used to analyse the soundness of the working capital

management in the manufacturing industries.

1. This study is expected to be of great importance to determine

the rate at which the management of working capital in the

manufacturing industries affect the efficiency and performance in

organisation

2. Determine best possible strategies required to effectively

manage working capital

3. The result of this study will be used to create a balance between

liquidity and profitability in businesses.

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1.4 OBJECTIVE OF THE STUDY

The objective of the study is to examine the effect of efficient

working capital management system on the growth ofmanufacturing industries. More specifically, other objectives are:

i. To find out the effect of working capital on the short and long

term survival of a company.

ii. To assess the level of effective control of working capital

management

iii. To evaluate the impact of efficient working capital

management on the growth of manufacturing industries.

iv. To provide plausible recommendations and on how working

capital could be effectively managed for improved organisational

performance.

v. To find out methods of managing working capital in Lever Brothers

Plc

1.5 THE SCOPE OF STUDY

The research work examined the factors which influenced the

efficiency of working capital management using the UNILEVER

NIGERIA PLC as a case study. The work covered the relating

working capital in the period of study.

1.6 RESEARCH HYPOTHESIS

In the process of this research, the researcher intends to examine

the hypothesis stated below:

HYPOTHESIS 1

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1. NULL HYPOTHESIS (HI)

The profitability of a company does not depend on its liquidity

ALTERNATIVE HYPOTHESIS (HO)

The profitability of a company depends on its liquidity

2. HYPOTHESIS 2

NULLHYPOTHESIS (HI)

The company does not have working capital as at needs to

manage the available resources

ALTERNATIVE HYPOTHESIS (HO)

The company has working capital as at needs to manage the

available resources

3.

1.7 DEFINITION OF THE TERMS

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Fixed Assets: These are the assets acquired that are used for more

than one year which produce economic benefit

Current Assets: These are assets which are expected to beconverted to cash in one year to meet current obligation

Current Liability: These are liabilities that a firm must satisfy

(pay) within one year

Cash: This is the basic input needed to keep the business

running on a continuous basis

Capital: Money invested to carrying on a business for the

purpose of getting profit

Capital Employed: Total money tied up in a business to allow it

operate

Investment: Act of putting money on a business to make profit

Inventory: This is a general terminology referring to stocks of

different articles

Batch: A number of things dealt with at a time as a group.

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CHAPTER TWO

LITERATURE REVIEW

2.1 THE CONCEPT OF WORKING CAPITAL

Working Capital, in the simple words, means the capital

invested in the current assets of a business

However it has been variously defined as : The current assets of a

company that are changed in the ordinary course of business from

one form to another, as for example, from cash to inventories,

inventories to receivables, receivables into cash. So, Working

Capital is descriptive of that capital which is not fixed. But the more

common use of working capital is to consider it as the difference

between the book value of the current assets and current

liabilities.

Thus, there are two different opinions about the meaning of the

term Working Capital

(1) According to first school of thought, working capital represents

all current assets of the Company. They believe that working

capital represents those assets, which change their form during the

process of production.

Working Capital = Total Current Assets

(2) According to the second school of thought, working capital is

the excess

of current assets over current liabilities.

Working Capital = Current Assets Current Liabilities

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Current assets include cash, accounts receivable, notes receivable,

advances on contracts, inventories etc. Current liabilities include

accounts payable, notes payable, accrued expenses, temporary loansetc. Under this concept an attempt is made to measure net working

capital of the Company.

To avoid the confusion involved in the interpretation of working capital,

the total current assets are described as gross working capital, while

the excess of total current assets over total current liabilities are

described as net working capital.

2.2 FEATURES OF WORKING CAPITAL :

The features of the working capital distinguishing it from the fixed

capital are as follows:

i) Short Term needs

Working capital is used to acquire current assets, which get converted

into cash in a short period. The duration of working capital depends on

the length of production process, the time that elapses in the sale and

the waiting period of the cash receipt.

ii) Circular Movement

Working capital is constantly converted into cash, which again turns

into working capital. This process of conversion goes on continuously.

It moves in a circular way. That is why working capital is also

described as circulating capital

iii) An element of permanency

Though working capital is a short-term capital, it is required always

and forever. It is required to run the production activity of the firm

smoothly and uninterruptedly. So long as the production continues, the

firm will constantly remain in need of working capital.

iv) Fluctuating

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Though the requirement of working capital is felt permanently, its

requirement fluctuates more widely than the fixed capital. The

requirement working capital varies directly with the level of production.The portion of working capital that changes with production, sale, price

etc. is called variable working capital

v) Liquidity

Working capital is more liquid than fixed capital. It can be converted

into cash within a short period and without much loss. A firm in need of

cash can get it through the conversion of its working capital by

insisting

on quick recovery of its bills receivable and by expediting sales of its

products. It is due to this trait of working capital that the firms with a

larger amount of working capital feel more secure.

vi) Less Risk

Investment in the working capital is less risky as it is a short-term

investment. Working capital involves more of physical risk only and

that

also is limited. It involves financial or economic risk to a much less

extent because variations of the product prices are less severe

generally. It is also free from technological changes as it gets

converted into cash again and again.

2.3 WORKING CAPITAL OR CASH OPERATING CYCLE

A working capital or cash operating cycle is the total length of time

required to complete the following sequence of events.

- Conversion of cash into raw materials

- Conversion of raw materials into works in progress

- Conversion of working in progress into finished goods

- Conversion of finished goods into debtor through sales

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- Conversion of debtor into cash through debt collection

This working capital cycle is the total length of time betweeninvestment on raw materials at the start of the production process

(cash outflow) and time of recovery at the end with the collection of

cash from debtors (cash inflow). As an introduction to the working

capital cycle, here is a quick reminder of the main types of cash inflow

and outflow in a typical business:

Inflows Outflows

Cash sales to customers Purchasing finished goods for re-sale

Receipts from customers who were

allowed to buy on credit (trade

debtors)

Purchasing raw materials and other

components needed for the manufacturing

of the final product

Interest on bank and other balances Paying salaries and wages and other

operating expenses

Proceeds from sale of fixed assets Purchasing fixed assetsInvestment by shareholders Paying the interest on, or repayment of

loans

Paying taxes

Cash flow can be described as a cycle: The business uses cash to

acquire resources (assets such as stocks).The resources are put to

work and goods and services produced. These are then sold to

customers. Some customers pay in cash (great), but others ask for

time to pay. Eventually they pay and these funds are used to settle

any liabilities of the business (e.g. pay suppliers).And so the cycle

repeats

Hopefully, each time through the cash flow cycle, a little more money

is put back into the business than flows out. But not necessarily, and if

management dont carefully monitor cash flow and take corrective

action when necessary, a business may find itself sinking into trouble.

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2.4 DETERMINANTS OF WORKING CAPITALThere are no set rules or formulate to determine the working capital

requirements of a firm. There are n numbers of factors influencing the

working capital requirements of a firm, some of which are;

i) Nature of business

Working capital requirement of a firm is basically influenced by the

nature of its business. Trading and financial firms require large amount

of working capital. In contrast, the manufacturing firms require less

amount of working capital and large amount of fixed assets.

ii) Sales and Demand Conditions

The sales and demand conditions of a firm also affect its working

capital position. It is difficult to precisely determine the relationship

between volume of sales and working capital needs. Sales depend on

the demand conditions. Most of the firms experience seasonal and

cyclical fluctuations in the demand of their products and services.

These business variations affect the working capital requirement,

particularly the temporary working capital requirement of the firm.

When there is an upward swing in the economy, the sales will

increase and untimely the firms investment in inventories and debtors

will also increase. On the other hand, when there is a decline in the

economy, the sales will fall and ultimately, the level of inventories and

debtors will also fall. Under recessionary conditions firms try to reduce

their short-term borrowings.

iii) Technology and Manufacturing Policy

The manufacturing cycle of the firm also affects the requirement of the

working capital. The manufacturing cycle comprises the purchase and

use of raw material and production of finished goods. Longer the

manufacturing cycle, larger will be the firms working capital

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The price level changes also affect the level of working capital.

Generally, rising price levels will require a firm to maintain higher

amount of working capital. However, the effect of rising prices may bedifferent for different companies, as though the general price level

increases, the individual prices may move differently. Therefor some

firms may require more working capital, while other may require less

working capital in case of price rise.

viii) Growth and Expansion Plans :

The growth and expansion plans to be undertaken by a firm also affect

its requirements of working capital. Hence the planning of the working

capital requirements and its procurements must go hand in hand with

the planning of the growth and expansion of the firm. Even the

expansion of the sales also increases the requirements of working

capital.

2.5 FORECASTING WORKING CAPITAL REQUIREMENT

Occasionally, a company requires forecasting the amount of working

capital needed to finance an increase in output or introduction of new

products. The anticipated production level and production costs,

length of production cycle, planned stock level and credit term are all

factors to be considered in preparing a working capital forecast.

A firm has to maintain an adequate level of working capital to run its

operations smoothly and effectively. It should be adequate in the

sense that it shall not be more than the requirements nor it shall be

less than the requirements. Both the excessive as well as inadequate

working capital positions are dangerous from the firms point view.

We know that the current liabilities are met out of the current assets.

So the level of current assets shall be sufficient enough to meet the

current liabilities. Excessive working capital refers to the position

where when the level of current assets is much higher to meet current

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liabilities. The excessive capital has opportunity cost for the firm, as

this excessive capital remains idle in the firm, which earns no profit for

the firm. If these funds shall be invested in some profitable project, itadds the profitability of the Company.

On the other hand, inadequate working capital refers to the position

where the current assets are not sufficient enough to meet the current

liabilities. Such type of position may be harmful to the firm as it may

interrupt the production and sales of the Company, which ultimately

affects the profitability of the Company. Moreover if the liquidity

position of the firm is not adequate enough to meet its current

liabilities, it may affect its credibility in the market.

Therefore an enlightened management should maintain the right

amount of working capital on a continuous basis. Only then the proper

functioning of business operations can be ensured. The amount of the

working capital shall be maintained at such level, which is adequate

for it to run its business operations, neither excessive nor inadequate.

This level of working capital is called as the Optimum Working

Capital.

2.6 Risk Return Trade-off :Liquidity v/s Profitabilit

The level of working capital affects the degree of risk and profitability

both. Hence the level of working capital should be so fixed that, on the

one hand, its financial soundness is maintained and on the other

hand, its profitability is optimised.

At this point it is necessary to be clear about the meaning of solvency

or insolvency of the firm. Solvency means a situation in which a firm

can easily repay its debts as and when they mature. On the other

hand, insolvency is a situation in which a firm is not able to repay its

debts as and when they become due for payment.

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The term risk implies the profitability that a firm will become technically

insolvent, so that it will not be able to meet its obligations as and whenthey become due for payment.

2.6.1 Nature of trade-off:

If profitability is to be increased, the firm must increase its risk. If the

firm wants to decrease risk, its profitability will also decrease. If a firm

wants to maintain insolvency, it must maintain a higher level of

liquidity. That is, it must hold a larger amount of current assets such as

cash, receivables, stock of goods etc., so that there would be no

problem in repaying the debts as and when they due for payment.

However, if a firm holds more amount of current assets, the prospects

of profit decline due to the fact that most of its funds are locked up in

idle current assets, which earn no profit.

On the other hand, if a firm wants s to increase its profitability, it must

be prepared to increase its risk of insolvency, as it would have to

reduce its investment in current assets. However a smaller amount of

liquidity increases risk of insolvency and, at the same time, it

increases profitability also.

The firm should maintain the its current assets at such level that on

one hand its profitability increases and on the other hand its risk of

insolvency decreases. There should be a balance between profitability

and risk. The level, at which there is a trade-off between the risk and

return, is the optimum level of working capital for a firm

2.7 MANAGEMENT OF WORKING CAPITAL

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Working Capital management refers to the administration of all

aspects of current assets namely cash, marketable securities, debtors

and stock(inventories) and current liabilities.The financial manager should determine levels and composition of

current assets. He must see that right sources are tapped to finance

current assets and that current liabilities are paid in time.

Working capital management is critical for all firms, but particularly for

small firms. A small firm may not have much investment in fixed

assets, but it has to invest in current assets. Further, the role of

current liabilities in financing the current assets is far more significant

in case of small firms, as, unlike large firms they, face difficulties in

raising long-term finances. The main problems of the management of

working capital are as stated below:

a. to determine a proper amount of working capital to be held in the

Business i.e. estimating the working capital needs

b. to take decision on the sources of working capital i.e. procurement

of Working capital

c. to ensure that the working capital is efficiently utilised i.e. optimum

of utilisation of working capital

Before we consider these problems lets first understand some of the

Principles of working capital management:

2.7.1 Principles of Working Capital Management :

The financial manager must keep in mind the following principles of

Working capital management:

i) Principle of Optimisation

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The level of working capital must be so kept that the rate of return on

investment is optimised. In other words, the working capital should be

maintained at an optimum level. This is the point at which the increasein cost due to decline in working capital is equal to the increase in the

gain associated with it.

According to the principle of optimisation, the magnitude of working

capital should be such that each Naira invested adds to its net value.

In other words Capital should be invested in each component of

working capital as long as the equity position of firm increases

ii) Principle of Risk Variation

This principle is based on the assumption that the rate of return on

investment is linked with degree of risk in the business. The greater on

investment is linked with the degree of risk in the business assumes,

the greater is the opportunity for gain or loss.

iii) Principle of Cost of Capital

Each source of working capital has different cost of capital. The

degree of risk also differs from one source to another. The type of

capital used to finance working capital directly affects the amount of

risk that a firm assumes as well as the opportunity for gain or loss and

cost of capital. A firm should raise capital in such a manner thata

balance is maintained between risk and profit.

iv) Principle of Maturity of Payment :

This principle states that the working capital should be so raised from

different sources that the firm is able to repay them on maturity out of

its inflows of funds. Otherwise the firm would fail to repay on maturity

and ultimately, it would find itself into liquidation though it is earning

huge profits. This implies that the firms ability to repay its short-term

debts depends not on its earnings but on the flow ofcash into it.

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These are some of the principles of working capital, which a financial

manager should keep in mind while managing working capital.

Nowlets discuss how to manage working capital.v) Estimating Working Capital needs :

The first step in managing working capital is to estimate about the

working capital needs. The most appropriate method for calculating

working capital needs of a firm is the concept of operating cycle.

In estimating working capital needs, different people adopt different

approaches. Some authors suggest that the working capital should be

greater than the minimum requirements of the firm. The management

should feel safety. It would be able to meet its obligations even in

adverse circumstances. However, the excessive capital may lead to

waste and inefficiency. On the other hand, many authors suggest that

the working capital should be lower than the requirement so that no

idle funds shall be invested in the current assets and it ultimately leads

to increase unprofitability of the Company. However, in such case the

firm always have risk of technical insolvency as it may not meet its

obligations as and when they falls due for payment.

So the question is what the proper amount of working capital is. It is

not an absolute amount. It depends upon the needs and

circumstances available in the firm.

2.8 MANAGEMENT OF COMPENENTS OF WORKING CAPITALThe financial manager of a firm shall, while thinking about the

management of working capital, consider the management of the

following components of working capital individually:

1. Cash Management

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2.InventoryManagement

3. Receivable Management

The exercise of management of each component of Working Capitalleads to effective management of Working Capital of a firm.

Lets have a brief idea about the management of each component of

working capital.

2.9 CASH MANAGEMENT

Cash is the medium of exchange which allows management to carry

on the various activities of the business on day to day basis. It

includes coins, currency, cheques held by the firm and the balance in

its bank accounts. In a broader sense, it also includes Near Cash

Assets such as marketable securities and time deposits with the

bank.

A firm should have a sufficient balance of cash neither more nor less

than the requirements. A firm holds cash for the following motives:

a) Transaction Motive, This is the need of holding cash to satisfy

normal disbursement and collation activities associated with firms

operations. This motive of holding cash is to meet day to day

obligations of a company.

b) Precautionary Motive, The purpose of holding cash in this case to

meet unforeseen contingencies like fire, accident, sudden breakdown

of equipment or vehicles. If expected cash is not received as planned

for, cash held on precautionary basis could be used to satisfy any

obligation that comes up which ought to have been satisfied by

expected cash.

c) Speculative Motive and This motive of holding cash is to create the

ability for a firm to take advantage of special opportunities that if acted

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upon quickly will favour the firm. Examples of this would be purchasing

of stock of a greater discount or investing in profit making

opportunities.

2.9.1 CASH MANAGEMENT STRATEGIES

Cash balance is significantly influenced by the firms production and

sales techniques and by procedure for collection of sales and paying

for purchases.The cash management strategy of a firm involves the

consideration of the following four factors

-Ascertainment of the minimum cash balance and controlling the

Levels of cash

- Controlling Cash Inflows

- Controlling Cash outflows

- Optimum investment of surplus cash

i) Controlling the levels of cash

The financial manager of a firm shall have the following tools available

with him for controlling the levels of cash.

Cash Budget:

Cash budget is a statement showing the estimated cash inflows and

cash outflows over the next planning period. The surplus or shortfall of

cash is highlighted by the cash budget.

Providing for contingencies:

In addition to the level of cash determined by the cash budget, a

suitable minimum amount of cash must be kept for meeting the

unforeseen contingencies such as strikes, floods, fire etc.

Consideration of cost of shortage of cash:

The cost arises in terms of loss of firms reputation or additional cost of

borrowing at higher rate of interest shall be considered.

Availability of other sources of funds:

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In case of shortage of cash, which are the sources that can be trapped

for meeting the urgent cash requirements.

ii) Controlling of cash inflows

After having prepared the cash budget, a finance manager must

ensure that there is no significant deviation between the projected

cash inflows and the actual cash inflows.

Effective cash collection shall be made by adopting the following

techniques.

Concentration Banking :

The Concentration Banking is a system of decentralised collection of

accounts receivable in case of large firms having their business

spread over a large area, by opening a number of collection centers at

selected strategically located areas and making collections from that

centers from the customers residing in that area.

Local Box System

In this system, the firm hires a post-office box and asks its customers

to send the cheques to the box. The firms local bank is given authority

to open the box and credit the payment in the firms bank account.

iii) Controlling of cash outflows

The operating cash requirement can be reduced by controlling the

cash outflows. The financial manager can use the following techniques

for the purpose.

Centralised Disbursements:

All the payment can be made from only one account at the Head

Office. This will result in delay in presentation of cheques for payment

by parties who are working from distant places.

Playing Float

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Float means the amount tied up in cheques that have been drawn but

have not yet been presented for payment. There is always a time lag

between the issue of a cheque by the firm and its actual presentmentfor payment. As a result the firms actual balance at bank may be

more than the balance as shown by its books. This different is called

Payment in Float.

Optimum Investment of Surplus Cash

The financial manager shall use its the cash efficiently and for that

purpose, the following points shall be kept in mind.

Determining Surplus Cash

Surplus cash is the cash in excess of the firms normal cash

requirements. This requirement can be computed by the multiplication

of desired days of cash and average daily outflows. If the cash

balance is more than this normal requirement, then the surplus cash

can be invested somewhere to earn returns.

Determining Channels of Investment :

Surplus funds can be invested in marketable securities or somewhere

else. While exercising such discretion, a finance manager must take

care of security, liquidity, yield and maturity associated with

marketable securities

2.10 INVENTORY MANAGEMENT

Inventory constitutes the most significant part of current assets of

manufacturing companies. Because of large size of company a

considerable amount of fund is required on inventory. It is this

absolutely and effectively in order to avoid unnecessary investment.

The inventories are stock of the product a company is manufacturing

for sale i.e the components that make up the product. The various

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forms in which inventories exist in a manufacturing company are raw

materials, work in progress and finished goods.

Raw materials these are basic input that are available to meet

production requirement.

Work in progress these are semi manufactured product

Finished goods these are completely manufactured products which

are ready for sales.

The stock of raw materials facilitates production while the stock of

finished goods is required for smooth marketing operation.

A firm holds inventory mainly for the following motives:

a. Transaction Motive; to meet demand of stock items where the size

of the demand is known certainty

b. Precautionary Motive;This motive of holding inventories is to guard

against the risk of unpredictable changes in future demand and supply

c. Speculative Motive; This is to take advantages of special

opportunities that if acted upon quickly will favour the company. It also

helps to get discount on bulk purchasing.

As the inventory involves the investment of the funds, it should be

managed properly or rather controlled properly. Inventory

management is a planned method to determine which items is to be

purchased and how much to be kept in stock, so that the costs of

purchase and storage both are minimised without adversely affecting

either production or sales. It involves the decision of the firm as to the

extent to which inventories can be economically stored.

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The inventory hold by the firm involves the following cost to the firm:

a. Ordering Costs:

Every time an order is placed for stock replenishment; certain costs

are incurred called as ordering cost. It includes paper work costs,

follow up costs, staff costs etc.

b. Carrying Costs:

Carrying costs are the costs of holding inventory for a given period of

time. It includes storage cost, handling cost, insurance cost, obsolesce

cost etc.

It is possible to reduce its inventory without affecting the production

and sales. Though the use of simple inventory and planning control

techniques, excessive stock (inventory) can be reduced thus

enhancing the profitability of a firm.

2.10.1 Objectives of Inventory Management:

A fundamental objective of a good system of inventory management is

to be able to place an order at the right time from the right source to

acquire the right quantity at a right price and of right quantity.

Mainly there are the following objectives of the InventoryManagement:

1. to ensure adequate stock

2. to minimise inventories on hand

3. to maintain continuity in production

4. to minimise the cost of purchasing and storage

5. to minimise the wastage and loss

6. to reduce the risk of deterioration

7. o use the available capital effectively

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customers whose financial position is doubtful. A liberal policy results

into increase of sales and increase of profits. However, the risk of bad

debts and the opportunity cost of receivables are also increased. Thecollection costs are also increased.

On the other hand, a strict or stringent policy implies that the firm sells

in credit on a highly selective basis and only to those customers

whose financial position is sound. It results into reduction in sales and

reduction in profit also. However, the cost involved with the high

volume of receivables and risk of bad debts are also reduced. The firm

should determine its credit policy in such a manner that on one hand

its profitability is to be increased and on the other hand its liquidity

position is not hampered. That means the point at which the

profitability and liquidity is balanced is the optimum credit policy for the

firm.

2.12.1 Credit Policy Variables

While framing optimum credit policy, the financial manager shall

consider carefully the following variables of the credit policy:

a. Credit Standards

Credit Standards means the criteria on the basis of which, credit is

granted to a particular customer or particular group of customers. If

the standards are very strict in would reduce the volume of receivables

and vice versa.

Credit Standards of most of the firms include the creditworthiness of

the customer. That means the credit should be granted to a customer

after accessing his credit worthiness.

For accessing the creditworthiness of a customer two factors are

important

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i. Average collection period of a particular customer

ii. His default rate

While determining the creditworthiness of a customer five Cs are

taken into account:

i. Character

ii. Capacity

iii. Collateral

iv. Condition and

v. Capital

b. Credit Terms

Credit terms means both the credit period and the cash discount

offered, the credit period is the length of time for which credit is

extended to customers. It is stated by such terms as 3/15 Net45

meaning that if payment is made within 15 days, 3% cash discount will

be given. Even without discount, payments will be made within 45

days. Generally, the customers of the industry determine the credit

terms.

c. Collection Policy

The collection policy must be such as would help in collecting book-

debts in time and reduce the bad debts. A collection policy should

ensure prompt and regular collection. This would reduce the need for

more working capital and loss of bad debts. The firm must frame a

procedure to expedite collection from the customers.

e.g. First, a letter must be written to the customer to pay his dues. If he

does not respond, then a strong letter must be written. As a last step,

a letter must be sent informing the customer that legal action would be

taken is dues are not paid within certain days.

Thus, a financial manager of a firm shall, while managing its working

capital, consider carefully the management of the components of the

working capital, in the manner as stated above.

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2.13 Types of working capital

Working capital can be divided in two categories:

i) Fixed or permanent working capital

The volume of investment in current assets an change over a period of

time. But always there is minimum level of current assets that must be

kept in order to carry on the business. This is the irreducible minimum

amount needed for maintaining the operating cycle. It is the

investment incurrent assets. This is permanently locked up in the

business and therefore known as permanent working capital.

ii) Variable/temporary working capital

It is the volume of working capital that is needed over and above the

fixed working capital in order to meet the unforced market changes

and contingencies. In other words any amount over and above the

permanent level of working capital is variable or fluctuating working

capital. This type of working capital is generally financed from shorter

source of finance such as bank credit because this amount is not

permanently required and is usually paid back during off season or

after the contingency.

2.14 Sources of working capital

The company can choose to finance its current assets by

Long term sources

Short term sources

A combination of both

i) Long term sources of permanent working capital include equity and

preference shares, retained earnings, debentures and other long term

debts from public deposits and financial institution. The long term

working capital needs should meet through long term means of

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financing. Financing through long term means provides stability,

reduces risk or payment. And increases liquidity of the business

concern. Various types of long term sources of working capital aresummarized as follow

a) Issue of shares

It is the primary and most important sources of regular or permanent

working capital. Issuingequity shares as it does not create and burden

on the income of the concern. Nor the concern isobliged to refund

capital should preferably raise permanent working capital.

b) Retained earnings

Retained earnings accumulated profits are a permanent sources of

regular working capital. It is

regular and cheapest. It creates not charge on future profits of the

enterprises.

c) Issue of debentures

It creates a fixed charge on future earnings of the company. Company

is obliged to pay interest.

Management should make wise choice in procuring funds by issue of

debentures.

e) Long term debt

Company can raise fund from accepting public deposits, debts from

financial institutions like

banks, corporations etc. the cost is higher than the other financial

tools.

Other sources sale of idle fixed assets, securities received from

employees and customers are

examples of other sources of finance.

ii) Short term sources

Temporary working capital is required to meet the day to day business

expenditures. The variable working capital would finance from short

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term sources of funds. And only the period needed. it has the benefits

of ,low cost and establishes closer relationships with banker.

Some sources of temporary working capital are given below;a) Commercial bank

A commercial bank constitutes a significant sources for short term or

temporary working capital this will be in the form of short term loans,

cash credit, and overdraft and though discounting the bills of

exchanges.

b) Public deposits

Most of the companies in recent years depends on this sources to

meet their short term working capital requirements ranging fro six

month to three years.

c) Various credits

Trade credit, business credit papers and customer credit are other

sources of short term working capital. Credit from suppliers, advances

from customers, bills of exchanges, promissory notes, etc helps to

raise temporary working capital

d) Reserves and other funds

Various funds of the company like depreciation fund. Provision for tax

and other provisions kept with the company can be used as temporary

working capital.

The company should meet its working capital needs through both long

term and short term funds. It will be appropriate to meet at least 2/3 of

the permanent working capital equipments form long term sources,

whereas the variables working capital should be financed from short-

term sources. The working capital financing mix should be designed in

such a way that the overall cost of working capital is the lowest, and

the funds are available on time and for the period they are really

required.

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2.15 History of Unilever

Unilever Nigeria Plc, was incorporated as Lever Brothers (West Africa)

Ltd on 11th April, 1923 by Lord Leverhulme, but the companys

antecedents have to be traced back to his existing trading interests in

Nigeria and West Africa generally, and to the fact that he had since the

19th century been greatly involved with the soap business in Britain.

Unilever Nigeria Plc started as a soap manufacturing company, and istoday one of the oldest surviving manufacturing organizations in Nigeria.

After series of mergers/acquisitions, the company diversified into

manufacturing and marketing of foods, non-soapy detergents and

personal care products. These mergers/acquisitions brought in Lipton

Nigeria Ltd in 1985, Cheesebrough Ponds Industries Ltd in 1988. The

company changed its name to Unilever Nigeria Plc in 2001.

Unilever Nigeria Plc is a public liability company quoted on the Nigerian

Stock Exchange since 1973 with Nigerians currently having 49% of equity

holdings.

The long-term success of this business stems from the strong relationship

with the consumers based on the deep roots in the local cultures and

markets, creating products that help them to feel good, look good and get

more out of life and the total commitment to exceptional standards of

performance and productivity. In order to sustain this success, we

endeavor to maintain the highest standards of corporate behavior

towards our employees, consumers, customers, communities and

operating environment.

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3.4 TYPES AND SOURCES OF DATAPrimary data were used in the study. The source of the dark was

the staff of the concerned departments. The data was collected

through the administration of questionnaire.

3.5 INSTRUMENT OF DATA COLLECTION

The instrument used stated above was questionnaires. The

questions were simply set is such a manner that the respondents

will understand easily. The questionnaires were in two sections.

The sections A focused on bio-data information while section B

was based on questions pertaining to the research work.

3.6 METHODS OF DATA ANALYSIS

Data was analysed by inferential statistics and descriptive means.

The results of the research were presented with the use of tables

and percentage to facilitate simple representation classification and

interpretation of the data collected.

Inferential statistics, Chi- square method was used to test whether

the data collected would lead to the acceptance or rejection of

either the Null hypothesis (Ho) or the alternate hypotheses (Hi).

The Chi- square method was given as

X 2 = (fo fe) 2

fe

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Where

X2 = Chi- Squre

fo = frequency expectedfe = frequency observed

The significance level chosen for the purpose of testing this

hypothesis was 0.05, since this seems to be more acceptable and

realistic. Therefore, the criteria values were read on the table at the

point corresponding to the intersection of the significance level and

degree of freedom.

Degree of freedom (df) = (r-1)

Where

r = row

1 = constant

Decision Rule Reject Ho if X2 calculated is greater than

the tabulated value, accept if otherwise .

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CHAPTER FOUR

DATA ANALYSIS AND PRESENTATION

4.0 INTRODUCTION

This chapter contains analysis of data collected in the course of

this study. This analysis was based on the field research through

questionnaires administered to the staff of Unilever Nigeria.

A tabular format is used to present the data and chi-square methodis used to test and integrate the relevant findings of the research

work.

The data processing and analysis were manually done for each of

the research question contained in the questionnaire. The

responses are sorted out, categorized and later table to enhance

easy analysis and interpretation. Two hypotheses were posed by

the researcher. In this chapter each of the hypotheses was tested

vis--vis primary data.

The tables were used to summaries the responses of the

respondents collected based on their answers to them.

4.1 DATA ORGNISATION AND PRESENTATION

The questionnaires that were distributed to respondents were

seventy (70) copies out of which sixty there copies were well

answered and collected back by the researcher showing a

response rate of 90% which is considered adequate enough for an

accurate or very near accurate conclusion to be based on

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DISTRIBUTION OF RESPONDENTS ACCORDING TO

PERSONAL DATA

Table 1: GENDER DISTRIBUTION OF RESPONDENTSGender Frequency Percentage (%)

Male 38 60

Female 25 40

Total 63 100

Table 1 shows that 38 of the respondents represented by 60% are

male while 25 of the respondents represented by 40% are female.

Therefore male are more in the industry than female.

Table 2: AGE DISTRIBUTION OF RESPONDENTS

Gender Frequency Percentage (%)

21 30yrs 25 40

31 40yr 20 32

Above 41yrs 18 28

Total 63 100

It can be deduced from table 2 that 25 of the respondents

represented by 40% are between the ages of 21-30years, 32% of

them are between the ages of 31-40years while 28% of the

respondents are above 41 years.

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Table 3: MARITAL DISTRIBUTION OF RESPONDENTS

Status Frequency Percentage (%)

Single 33 52

Married 30 32Total 63 100

Table 3 shows that 52% of the respondents are single while 48%

are married. It shows that singles are more in the industry than

married.

Table 4: EDUCATIONAL QUALIFICATION OF RESPONDENTS

Qualification Frequency Percentage (%)

WASSCE/SSCE - -

OND/NCE 7 11

B.Sc/HND 32 51

MBA/MSc 16 25

PROFESSIONAL/OTHERS 8 13

Total 63 100

It is affirmed from table 4 that 11% of the respondents owns qualification

of OND/NCE, 51% of them owns BSc/HND, 25% of them owns MBA/MSc

while 13% of them owns PROFESSIONAL/OTHERS, qualification. Non of

the respondents has WASSSC/SSCE as the peak.

Table 5: DEPARTMENT DISTRIBUTION

Department Frequency Percentage (%)

Admin/Personnel 6 10

Purchasing 17 27

Purchasing 9 14

Sales 20 32

Raw Material 11 17

Total 63 100

Field Study: 2008

Table 5 shows that 10% of the respondents are in theAdmin/Personnel Dept, 27% are in accounting Dept, 14% are in

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purchasing Dept, 32% are in Sales Dept while 17% are in Raw

material Dept. It shows that majority of the respondents are from

Sales Dept.

Table 6: DISTRIBUTION BY LENGTH OF SERVICE

Length Frequency Percentage (%)

1 5yrs 8 13

5 10yrs 12 19

11 15yr 25 40

Above 15yrs 18 28

Total 63 100

Table 6 shows that 13% of the respondents have worked between

1-5years, 19% have worked between 5-10years, 40% have worked

between 11-15years, 28% have worked above 15 years.

SECTION B

PRESENTATION AND ANALYSIS OF DATA ACCORDING TO THE

QUESTION ITEMS

Table 7: Question 7

DOES YOU COMPANY HAVE ENOUGH WORKING CAPITAL?

Responses Frequency Percentage (%)

Yes 42 67No 8 13

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Total 63 100

Field Study: 2008

Table 7 shows that 67% of the respondents agreed to the question

by saying yes, 13% of them said No to the question while 20% of

them are not sure to the question.

Table 8: Question 8

WHICH OF THESE FACTORS MOSTLY AFFECT THE

MANAGEMENT OF WORKING CAPITAL?

Responses Frequency Percentage (%)Nature of business 23 36

Length of production, etc 32 51

All of the above 8 13

Total 63 100

Field Study: 2008

Table 8 shows that 36% of the respondents agreed that nature of

business affect the management of working capital, 51% of them

agreed that length of production, size of business etc affect themanagement of working capital while 13% chose all of the above.

Table 9: Question 9

WHAT THREAT DOES EXCESSIVE WORKING CAPITAL POSE

TO YOUR ORGANISATION?


Unnecessary build up of inventory 18 29Higher incidence of bad debts 15 24

Affect the profit of the business 10 16


Total 63 100

Table 9 shows that 29% of the respondents agreed that excessive

working capital will cause unnecessary build up of inventory, 24%

believe that it will cause higher incidence of bad debts, 16% believe

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that it will affect the profit of the business while 31% chose all of the

above.

Table 10: Question 10

WORKING CAPITAL SHOULD BE FINANCED BY?


Long term debt 16 25

Short term debt 23 37

A mixture of two debts 18 29

None of the above 6 9

Total 63 100

Table 10 affirmed that 25% of the respondents believe that working

capital should be financed by long term debt, 37% believe that it

should be financed by short term debt, 29% of them believe that it

should be financed by mixture of two debts while 9% believe that

none of them will be used to financed working capital.


WHAT FACTORS GUIDE ORGANISATION INVENTORY BUILDS UP?


Storage/holding costs 13 21

Set up/ordering costs 22 35

Stock out cost 10 16

Availability of discount from suppliers 10 16


Total 63 100

Table 11 shows that 21% of the respondents believes that factors

that will guide organisation inventory builds up is storage/holding

cost, 35% believes that it is set up/ordering cost, 16% believe it is

stock out cost, 16% believes it is availability of discount from

suppliers while 12% believe all of the above.

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DOES YOUR BUSINESS ORGANISATION UNDERTAKEN

PHYSICAL STOCK TAKING IN ADDITION TO HAVING A GOODINVENTORY DOCUMENTATION?


Yes 33 53

No 30 47

Total 63 100

Field Study: 2008

Table 12 shows that 53% of the respondents believes that the

organisation undertakes physical stock taking in addition to having

a good inventory documentation by saying Yes while 47% says No

to the question.


HOW IS AUTHORIZATION GIVEN FOR THE USAGE OF

INVENTORY IN YOUR ORGANISATION?


Predetermined inventory

document

29 46

Verbal instruction 20 32


Total 63 100

Table 13 affirmed that 46% of the respondent confirmed that

predetermined inventory document gives authorization for inventory

usage, 32% says that verbal instruction gives authorization for

inventory usage and remaining 22% of the respondents believe

that neither verbal instruction nor predetermined inventory

document gives authorization for inventory usage.

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Do you agree that the pace of growth of the company should notoutstrip the ability of the business to finance additional assets that

is needed to support any growth?


Yes 25 40

No 38 60

Total 63 100

Table 14 says that 40% of the respondents agreed that pace of the

company should not outstrip the ability of the business to finance

additional asset that is needed to support any growth. But, 60% of

the respondent said No.


CASH SHORTAGE CAN BE CORRECTED BY NEGOTIATING A

REDUCTION IN CASH OUTFLOWS SO AS TO REDUCE

PAYMENT. DO YOU AGREE?


Yes 41 65

No 22 35

Total 63 100

Table 15 affirmed that 65% of the respondent agreed that cash

shortage can be corrected by negotiating reduction in cash

outflows which will reduce payment. But 35% of the respondent

disagreed that cash shortage can be corrected by negotiating

reduction in cash outflows.

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A COMPANY CAN INCREASE IN SALES VOLUME BY

RELATING ITS CREDIT POLICY.Responses Frequency Percentage (%)

Yes 43 68

No 20 32

Total 63 100

Table 18 shows that 68% of the respondent said that company can

increase sales volume if credit policy is reduce. But 32% of them

no this statement.


WHY IS IT NECESSARY FOR A BUSINESS TO HAVE A CREDIT

POLICY?


To control its investment in

account receivable.

24 38

To ensure that credit facilities

are given to those that worth it.

39 62

Total 63 100

In Table 19, 38% of the respondent said that it is necessary for a

business to have a credit policy in order to control its investment in

account receivable while 62% of them said it is necessary in order

to ensure that credit facilities are given to those that worth it.


WHAT DO YOU THINK IT DETERMINES CREDITORS PAYMENTPERIOD?

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Debtor collection period 28 44

Availability of cash discount 16 25

Availability of cash surplus 9 14Al of the above 10 17

Total 63 100

According to table 20, 44% of the respondent said that debtors

collection period determines creditors payment period, 25% of

them said availability of cash discount determines creditors

payment period and 17% of them says that all the factors

mentioned determine creditors payment period.


DO YOU THINK ACCOUNTING RATIOS ARE GOOD MEANS OF

INTERPRETING FINANCIAL STATEMENT?

Responses Frequency Percentage (%)Yes 41 65

No 22 35

Total 63 100

65% of the respondent in table 21 said that accounting ratios are

good means of interpreting financial statement while 35% of the

respondent said No.

4.4 HYPOTHESIS TESTING

HYPOTHESIS 1

In testing null hypothesis 1 which states that the profitability of the

company does not depends on its liquidity level. The variables are

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the alternative hypothesis which states that the success or

otherwise of a company depends on effective management of

working capital.

HYPOTHESIS 2

Ho: The company does not have working capital as it needs to

manage the available resources variables are collected/ from table

7.

fo fe fo fe (fo fe)2 (fo fe)2

fe

42 21 21 441 21

8 21 13 169 8.05

13 21 8 64 3.05

Total 63 0 f = 32.1

The chi-square calculated is 32.1 from the table

at 0.05 level at significance at df (n 1) = (3 1) = 2

Chi square tabulated is 5.991

DECISION

Since the calculated chi-square is greater than the tabulated chi-

square at 0.05 level of significant, reject null hypothesis (Ho).

Therefore accept alternative hypothesis which states that the

company have working capital as it needs to manage the available

resources.

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CHAPTER FIVE

SUMMARY, CONCLUSION, RECOMMENDATION

5.1 SUMMARY

As it is explained from the beginning part of this discussion, the

management of working capital is a very important concept in every

organisation. This is why the study is channeled to how working

capital should be optimized and having adequate investment in

working capital in addressing this, the researcher examined the

effect of efficient working capital management on the growth ofmanufacturing industry.

In purchasing this objective, the researcher made use of both

descriptive and inferential statistical to analyse the data got through

the administration of questionnaires. The chi-square distribution

model was used to test the hypothesized questions.

The study revealed that management of the concerned

organisation reckons that effective and efficient management of

working capital is very important to the survival and growth of any

organisation. It is found that investment in working capital depends

on factors other than the nature of the business. It is also

discovered that the company invested adequately in their workingcapital.

5.2 CONCLUSION

Based on the findings of the study over twenty percent (20%) of the

capital employed is usually fixed up in working capital in Unilever

Nigeria Plc. This Phenomenon makes the management of working

capital important for the survival of firms and as such it shall be

adequately provided for and properly managed.

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Giving the attention paid to this study it is fund that returns and

cash flows can be improved through aggressive working capitalmanagement.

5.3 RECOMMENDATION

Recommendations were given on some factors in working capital

management based on the findings of this study thus:

i. Cash Management: The need to have effective cash

management. Organisation should avoid maintaining idle cash

balances unless it is necessary to do so. If a company keeps too

much cash it may be depriving itself of some other profitable

opportunities which the cash kept could have been used for the

improve returns. The idle cash may be invested in marketable

securities, used in replenishing stocks or to pay off contain current

assets or current liabilities or even used to purchase fixed assets.

Efforts should be made for effective and efficient cash plan as this

is the key to the survival of all business undertakings.

ii. Debtors Management: The need to have a good management

of debtors account.

It is known that no organisation can improve its sales return unless

it makes provision for credit facilities to customers. The

organisation should have a credit control policy which must be

strictly applied in order to minimize implicit cost and explicit cost of

selling on credit. Furthermore, organisations are advised not to

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relax their credit policy beyond a bearable level because more

often not the cost associated with such decisions are much more

than the gains.

iii. Management of Credits: The need for adequate management.

The brief of some organisations is that they should make short the

debtors payment period. This resolution may not be advantageous

to the company as the creditors too will interest in making short

they payment period as much as possible. On this note, the

company is advice to usually negotiate the payment period with the

creditors and try to meet up with any agreement they resolved on

as this may strengthen the relationship between the two parties.

iv. Stock Management: The need to have adequate stock

management. Organisation ensures that their investment

inventories (stocks) are properly monitored and control. The in and

out movement of stocks from stores should be controlled and

checked through proper documentation. Physical stock taking can

still be increased as this will forestall falsifications will respect to

records keep and equally help in identifying obsolete stocks,

damaged stocks as well as slows moving items. Pilfering can also

be checked through this medium.

Organisation should pay attention to the level of stock kept. They

should make efforts to keep stock as how as possible as this will

lead to the release of fund which would have been tried down if the

stock level is not checked. The ability to reduce inventory

successfully will depend on the reasons for holding inventories and

the reasons why it builds up.

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The research work has leads to focus effective management of inventories

on two cores area, which the researcher feels will be of much

benefit to organisations if considered.

v. Inventory Optimization: This area is assisted with the newly

developed sophisticated personal computer based inventory

optimization model. The model takes into account the required

safety and cycle stock levels while optimizing the cost trade off

between holding inventory and incurring a shortage situation.

vi. Demand Management: This area focuses on more detailed

information integration with both suppliers and customers. The

close links to customers demand forecast can have significant

benefits in inventory minimization both for the producer and the

suppliers.

vii. Working Capital Ratio: The need to have a close match on the

working capital ratio. Since it is known that accounting ratios are

good means of interpreting a companys financial positions

financed managers are implored to watch their working capital

ratios and ensure that they do not fall beyond the accepted

standards of below the industrial average of the manufacturing

industry.

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JOURNALS AND ARTICLES

Igbinosun, F. E. (2002): In search of Excellent Cash Management and

Control Strategies in Business endeavors. The Nigerian Accountant Vol.35, No 4 pp. 20-28

Ken, H. (1998), Improving returns and cash flow in process industries

through aggressive Working Capital Management Mercer Management

Consulting.

Michael, A. O. (1996): Inventory Model The National Association of

Polytechnics Accountancy Students. Kwara State Polytechnics Chapter,

Ilorin Vol 6. pp. 8

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Department of Management

Science,Lagos State University,

Ojo,

Lagos State

Dear Sir/Ma,

RESEARCH QUESTIONNAIRE

I am an MBA student of the Management Science Department of Lagos

State University Ojo Lagos State. I am conducting a research study on

The Management of Working Capital in the Manufacturing Industry (A

Case Study of Unilever Nig. Plc.)

This work is done in partial fulfillment of the requirement for the award of

a Masters in Business Administration

Please kindly answer the entire questions in the attached questionnaire,

the responses of the concerned top management staff are highly needed

on the questions. All information supplied by you shall be used for the

intended purpose.

Thanks.

Yours faithfully

Adeyinka Adeniji

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QUESTIONNAIRE

Instruction: Please answer the following questions by ticking

appropriate boxes provided.

SECTION A

PERSONAL DATA

1. Gender: Male Female

2. Age: (a) 21 30 ( ) (b) 31 40year ( ) (c) Above 41 years ( )

3. Marital Status: (a) Single ( ) (b) Married ( )

4. Educational Qualification (a) WASSCE/SSEC ( )

(b) OND/NCE ( ) (c) B.Sc/HND ( ) (d) MBA/MSC ( )

5. Which department or section are you in?

(a) Administrative/Personnel ( ) (b) Accounting ( )

(c) Purchasing ( ) (d) Sales ( ) (e) raw material ( )

6. What is your working experience in the company?

(a) 1-5 year ( ) (b) 5 -10years ( ) (c) 11 -15years ( )

(d) Above 15 years ( )

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13. How is authorization given for the usage of inventory in your

organisation? (a) By the use of predetermined inventory document

( ) (b) by verbal instruction ( ) (c) all of the above ( )

14. Do you agree that the pace of growth of the company should not

outstrip the ability of the business to finance additional assets that

is needed to support any growth? (a) Yes ( ) (b) No ( )

15. Cash shortage can be corrected by negotiating a reduction in cash

outflows so as to reduce payment. Do you agree?

(a) Yes ( ) (b) No ( )

16. The profitability of the company depends on the liquidity level,Do

you agree? (a) Yes ( ) (b) No ( )

17. Do you think that a company should sell on credit at all?

(a) Yes (b) no

18. A company can increase in sales volume by relating its credit policy

(a) Yes (b) No

19. Why is it necessary for a business to have a credit policy?

(a) To control its investment in account receivable ( )

(b) To ensure that credit facilities are given to those that worth it ( )

(c) All of the above ( )

20. What do you think, determines the creditors payment period?

(a) Debtor collection period ( )

(b) Availability of cash discount ( )

(c) Availability of cash surplus ( )

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(d) All of the above ( )

21. Do you think accounting ratios are good means of interpreting

financial statement? (a) Yes ( ) (b) No ( )

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Management of Working Capital Project

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