CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Capital can be classified into two broad categories based
on tenure viz. long term and short term capital.
The long term capital of firms is committed to investment
in fixed assets. It includes shareholders’ funds and long term loans. On the
other hand, short term capital is applied for investment in current assets such
as cash, marketable securities and short- term credits. Current assets are
usually acquired very often in varying quantities depending on the demand
structure for the firm’s product. Each time a decision to acquire current
assets is taken, finance becomes inevitable.
However, it does not necessarily mean that cash has to be
paid each time an order for recurrent production input is placed, rather it
implies that just like in the case of fixed assets, every decision on current
assets has financial implications. For instance, a firm has
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to decide how much of the material
used for production of goods and services are to be on credit or on cash and
carry basis. it also has to determine what proportion of its sale has to be on
credit. Also both the optimum and minimum stock levels for raw materials and
work-in-progress (WIP) have to be determined and maintained at a given point in
time.
Orjih (2001:85) refers to working capital as a firm’s
investment in short –term assets cash, marketable securities, trade debtors and
stock, less current liabilities used to finance the current assets. He stated
that working capital management therefore means the planning and controlling of
both current asset and current liabilities. It involves the administration of
cash receivables, inventories, marketable securities and the current
liabilities.
He also discussed the two aspects of working capitals the
“gross working capital: This means that the firm’s investment in current
assets. Current assets are those which can be converted in to cash within an
accounting year and they
Include cash, short term securities, and debtor’s bills
receivable and stock. Net working capital- this refers to the difference
between
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current assets and current
liabilities. Current liabilities are those of outside is which are expected to
mature for payment within an accounting year.Net working capital can be
positive or negative. It is positive when current assets exceed current
liabilities and negative when current liabilities exceed current assets.
Davidson (1984:401) defined “working capital as “current
assets less current liability”. He also defined it as “circulating capital”.
Weston &Brigham (1977:142) defined working capital
management as “management decision on the amount of capital invested in various
current assets and how this investment is to be financed”. It is fundamental
and of great importance to a business as it enables the organization conduct
its activities from free financial embarrassment.
Working capital management also aids the management to
avoid the losses consequent upon incurring commitments below or above its
capacity in ordinary course of business.
Retrof (1982:249) said that a firm should always maintain
a sound working capital position for it to have enough to run its
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business activities. Both excessive
as well as inadequate working capital position are dangerous from firm’s view
point.
Excessive working capital means idle fund which means no profit
for the firm, while inadequate working capital renders the firm unable to avail
attractive credit opportunities and drastic reduction in the rate of return on
total investment. The firm losses its reputation and capital base could be
eroded, there by affecting the organizations credit worthiness.
Just as blood is life wire of any human being, the working
capital of any company is the pivot around which its day-to-day operations
revolve. it cuts across all departments and functions of an organization to the
extent that all the organizational activities would ground to a halt of the
working capital were not properly managed.
Therefore, the need for a sound and realistic working
capital policy for a manufacturing from like Anambra Motor Manufacturing Company
(ANAMMCO) becomes imperative
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The Anambra motor manufacturing company (ANAMMCO) was
incorporated in 1977 as a private limited liability company. It was established
in line with a joint venture agreement which the government entered with
Daimler Benz Ag of Germany, now Daimler chyler AG (DCH) of Germany as the
technical partners. The shareholding structure is presented as follows in table
below:
Table 1: shareholding structure of Anammco
Shareholder’s
|
percentage(%)
|
Daimler
|
40
|
Federal ministry of finance incorporated
|
35
|
Other investors
|
25
|
100
|
Source: National council on privatization secretariat
bureau of public enterprises investment opportunities in Nigeria Auto motive
industry.
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According to the term agreement, the
plant is to assemble/ manufacture Mercedes Benz brands of trucks and buses of
different models and capacity.
The joint venture agreement provided some protection of
the company through import restriction.
The company was to assemble commercial trucks and buses
with payloads of 2.5 tons and above. The company started production of vehicles
with pay load of 5 tons and above. The plant was commissioned on July 8, 1980
with actual production starting in 1981.
It has an installed capacity of assembling 750 vehicles
per annum on all a single shift.
The plant is located at Enugu and preliminary inspection
inspection revealed that the facilities were in good technical condition, which
indicated a high standard maintenance. This actually reflected in the award to
the company of 150900l certificate for total quality management.
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Anammco is the second surviving
vehicle plant in the country. It is producing at 10% of its installed capacity
as clearly indicated in the company’s appendix 1.
1.2
Statement of The Problem
The present world economic hazard coupled with economic
policies being operated in the nation has led to a situation where many
business organizations have to fold up. Others barely survive by thriving on
very lean financial and material resources. This is due to the mere fact that
procurement of capital to finance their daily operations is increasingly
becoming difficult. However, the efficient management and control of working
capital can generate a considerable amount of internal financing.
The project topic seeks to analyze the Anambra motor
manufacturing company’s (ANAMMCO) working capital and its segment. The study
uses ration analysis as a measure of efficiency of working capital management.
The topic will equally determine the extent to which the profitability of the
company is dependent on the level of its working capital management, using the
percentage ratio measurement.
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The objective of any study undertaken is to contribute to
the development and growth of its case study. The purpose of this study
includes:
a) To show how working capital management can affect the
profitability of the company.
B)
To
examine the contribution made by the working capital management on the
activities of a manufacturing company, with particular reference to ANAMMCO.
C)
To
illustrate the ways in which working capital management can be used as a tool
for cost minimization.
D)
To
recommend where necessary and appropriate alternative working capital
management technique practical and procedure to ANAMMCOs top officials.
1.4
Significance of The Study
This work, working capital management as a tool for cost,
minimization and profit maximization will assist biz organization on their
operations and enable them to formulate a working capital
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management that is suitable for their
business environment in order to optimize the profit of their operations.
It is hoped that factors that defy the smooth operation of
the company in an area of working capital will be identified. This will go a
long way to aid the management in future planning of an ideal working capital
management. Finally, it is hoped that recommendations of this work would be of
great importance to the other manufacturing companies that may adopt them to
suit their goals. This research work also intended to provide a base for
further researches inthe area of working capital management, the government
will benefits as efficient and effective working capital will bring about
increase in profits which is taxable, and can also be used for expansion and
employment criteria.
1.5
Research
Questions
1
How
does working capital management contribute to the activities of a manufacturing
organization?
2
Does
working capital management affect the profitability of a manufacturing concern?
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4
What
are the alternative working capital management techniques?
These
questions when answered will show how well working capital management
contribute s in serving as a tool for cost minimization and profit maximization
in ANAMCCO.
1.6 Statement of
Hypothesis
In other to determine the contribution, efficient working
capital management had made towards the performance and growth of the company,
it is important to test the following hypothesis:
H0: The profitability of a company does
not depend on the level of company’s working management capital.
H1: The profitability of a company is
dependent of the company’s working capital management.
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H1: working capital management is a
tool for management control in a business concern.
H0: Ineffective working
capital management has no effect on
production.
H1: Ineffective working capital
management is the cause of inefficiency in production.
1.7 Scope of the
Study And Its Limitation
In the process of conducting this research topic, the
researcher’s examination will only be concentrated on the case study of
ANAMMCO. This research work will cover working capital management. The
researcher intended as much as possible to conduct an adequate researcher but
could not be achieved due to some constraints. Based on the developing nature
of the nation’s economy and high demand of adequate working capital, there is
every indication that there are constraints to the validity of the conclusion
reached.
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This study is limited by certain
constraints required to write of, the cost incurred in making this project a
success. Such limitations are as follows.
1) Lack of fund required to cover the cost
of transportation, materials for working and typing the project and binding it.
2) Time factor: the time allotted for
the completion of this study is too short for more objective of the results. An
extension of the time given should be encouraged. The researcher is suggesting
that project topic should be approved for the writer starting from the first
semester of the academic session.
3) Co-operation from the staff of the
company: The researcher, if not for the help of friends and well the company
and libraries could have been so difficult. The management and staff thought
that the researcher was about to carry out espionage to other competitors. It
took the researcher some time to convince the management that the research is
strictly for academic purpose.
4) Lack of exeat to leave school for
research materials and to make more enquires.
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The
following terms are defined in the contexts which are used in this research
work:
1
Working capital management: This refers to the administration of current assets
and current liabilities.
2
Working capital: Excess of current asset over current liabilities. It is also
defined as capital available for day- to – day operations.
3
Current Assets: cash and other assets that are expected to turn into cash if
sold or exchanged within the normal operating cycle of the firm usually one
year.
4
Current liabilities: A debt or obligation that must be discharged within one
year.
5
Gross working capital: This means that firms investment in current assets.
6
Net working capital: This refers to the difference between current assets and
current liabilities.
7
Liquidity: Refer to the available of cash or near resources for meeting
company’s obligations.
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9
Cash flow: cash receipt less disbursement from a given assets or group of
assets for a given period.
10
Effectiveness: This is the extent to which a predetermined goal or objective is
achieved.
11
Efficiency: The extent to which inputs are used in relation to a given of
output.
12
Re-order time: The time at which new stock is due for procurement.
13
Economic Order quantity: This is the optimum order quantity for an item of
stock, which will minimize cost.
14
Spontaneous financing: Sources of financing that arises from ordinary business
transaction.
15
Accounting: net liquid assets computed by deducting current liabilities from
current assets.
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Working capital is the cash available for day to day operations of an
organization. One borrows cash to be able to buy assets or to pay for
obligations.
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