AN EXAMINATION ON THE MANAGEMENT OF WORKING CAPITAL

AN EXAMINATION ON THE MANAGEMENT OF WORKING CAPITAL

A CASE STUDY OF NIGERIA BAG MANUFATURING COMPANY

ABSTRACT

This study examines the Management of Working Capital with special reference to Nigeria Bag Manufacturing Company.

This study employs survey research design. Analytically, the research adopted descriptive statistics to examine the impact of working capital in manufacturing organisations in Nigeria.

Data were basically sourced from primary method through means of a well structured questionnaire. Twenty Five (25) respondents were sampled from the population based on simple random sampling technique.

Four hypotheses were formulated and tested with the used of Chi-Square Statistical Technique. The analysis resulted into rejecting the four null hypotheses and concluding that; The working capital requirement of a business venture is dependent on the level of the business that has been established; Excessive working can increase production cost; The longer the working capitals cycle of an organization, the greater the investment in working capital; and there is no industry norm or minimum agreed level of investment in working capital.

The study proffered valuable recommendations as business organization should manager its working capital efficiently, in such a way as to avoid the ills of over capitalization and under capitalization.

TABLE OF CONTENT

Chapter one

1.0     General background of the study

1.1     Background of the company, Nigeria bag manufacturing

company (BAGCO).

1.1.1   Historical background

1.1.2   Nature of business activities

1.1.3   Organization structure

1.2        Statement of problem

1.3        Significance of the study

1.4        Objectives of the study

1.5        Statement of research questions

1.6        Research hypotheses

1.7        Scope and Limitation of the study

1.8        Definitions of technical terms

1.9        Research methodology

CHAPTER TWO

2.0     Literature review

2.1     Management of inventories

2.2     Management of cash

2.2.1 Cash planning

2.2.2 Managing the back flows

2.2.3 Optimal cash level

2.2.4 Investing surplus cash

2.2.5 Cash operating circle

2.3 Management of receivable

2.4 Management of current liabilities

2.5 Benefit of management of working capital

2.6 Working capital ratio

2.7 Working capital circle

2.8 Overtrading and working capital

2.9 Under trading and working capital

CHAPTER THREE

3.0 Research methodology

3.1 Restatement of research hypotheses

3.2 Population of study

3.3 Sampling design and procedure

3.4 Source of data

3.4.1 Primary sources of data

3.4.2 Secondary sources of data

3.5 Data collection instrument and administration

3.5.1 Questionnaire

3.6 Procedure for data analysis

3.6.1 Chi-square (X2) analysis

3.6.2 Percentage analysis

3.6.3 Level of significance

CHAPTER FOUR

4.0 Data presentation, analysis and interpretation

4.1 Test of hypothesis

4.2 Conclusion

Chapter Five: Summary of Finding, Recommendation and Conclusion

5.0 Summary of findings

5.1 Recommendations

5.2 Conclusion

Bibliography

Appendix

Questionnaire

CHAPTER ONE

INTRODUCTION

1.0   GENERAL BACKGROUND OF THE STUDY

The enactment of the Nigeria Enterprise, promotion Decree of 1972, otherwise known as Indigenization Decree, made many businesses which were higher in the hands of foreign business men to pass into the hands of Nigerians. Perhaps by more co-incidences the economy became over liquid. The result at the excess liquidity was inflation.

To succeed in this new challenge passed by the said Indigenization Decree, Nigerian entrepreneurs and business concerns need at least a fair comprehension of essential aspects of financial management and more specifically, working capital management.

Generally, it is believed that the presumed objective at financial management especially in private organizations is the maximization of the value of the firm. Thus, wealth maximization of the present value of the future streams of cash inflows of the shareholders which are a derivative at the profitability of a firm. (Brokington, 1983).

Although profitability may be considered the objectives at a business, nevertheless, the mismanagement of work capital can effectively bring to a half, or to its ultimate downfall, what might otherwise be a successful and profitable organization.

Therefore, according to Howard (1982) working capital is defined as ”the asset held for current use within a business less the amount due to those who await settlement in the short-term in whatever form”. In the same vein,

Olowe (1997) views working capital as “the capital available for running the day to day operation of and organization. It is defmed as current Assets less Current liabilities”.

Current Assets are the circulating assets of the business; these are the assets that are not permanent in nature. They include: Cash at hand and bank; Short-term investments such as treasury bills; Stock of raw materials, work-in-progress and finished goods; Debtors, Accrued income etc. Current liabilities on the other hand are debts of the business that have to be settled within the following twelve months. They include; Creditors; Current taxation, Bank overdraft etc. A current liability for a sizeable part of the business sources at finance and it is the cheapest form at business finance (Olowe, 1997).

Pandey (1986) views working capital form two perspectives. These are gross working capital and net working capital. Gross working capital means “firms investment in current assets. Net working capital on the other hand is “current asset less current liabilities”.

The importance of gross working capital is indicated by optimum investment in current assets. Here, the investment neither is in excess; resulting into tying down the capital of the business, nor investment inadequate; which will make the business insolvent. On the other hand, net working capital implies, that the current liabilities.

This is necessary in order to protect the interest of creditors. For this to be effective, current assets must be well above currents liabilities. Here, current ratio of 2.1 may be considered necessary (Pandey, 1986).

In view of the forgoing, working capital management is that managerial effort or approach which seeks to ensure that correct amount of investment are made by firms in working capital, adequate enough to cope with the business level being operated by that firms.

Working capital management therefore reverses to the management at all aspect of current assets and current liabilities. Hence, the managing working capital, it is essential to known the amount to be invested in current assets and the appropriate sources from which the finance will come.

Evidently, two extremes are easily notice at regards investment in working capital by firms, that is

·        Having excessive working capital and;

·        Having in adequate working capital

However, the objective of a finance manager as regards the management of working capital is the strike a balance: between these two extremes because excessive working capital is expensive and inadequate working capital very dangerous. These extremes can be likened to liquidity and profitability on which compromise is being achieved with managerial effort on working capital (Brokington, 1983).

In essence, working capital management hopes to ensure the most efficient use to resources open to the firms, and it also involves making sure that the commitment to working capital is as low as possible. However, this is determined to a larger extent by the type of industrial involved, but there may be other policy considerations which may influence the level. (Pandey 1985).

1.1 BACKGROUND OF THE COMPANY NIGERIA BAG MANUFACTURING COMP ANY-(BAGCO)

1.1.1 Historical Background

The company, Nigeria Bag manufacturing Company Limited

(Bagco) was incorporated in 1964 as a wholly owned subsidiary of flour mills of Nigeria plc. Almost immediate bagco’s pioneering spirit was established in 1972 new polypropylene bag manufacturing equipment was installed in the premises at Eric Moore Road, Surulere Lagos. As the first company in Nigeria to embrace this new technology Bagco enjoyed rapid expansion such that by 1978 the complete production range had been transferred to the new polypropylene technology.

Over the next decade bagco grew steadily as the production base was increased to meet the increasing demands of the market in terms of volume and product range. The next step for Bagco was to incorporated Northern Bag manufacturing Company Limited (Bagco North) in 1990 thereby enabling Bagco to become a truly pan Nigeria manufacturer. Bagco North commenced operations at sharada phrase 3, Kano in 1991. The 1990 saw both Bagco and Bagco North developed a product range of plain woven and laminated bags to meet the demands of Industrial, Agricultural and Domestic customers. Bagco Group had now truly become a house hold name with everybody knowing “Bagco Super Sack”.

In 1999 Bagco again showed its pioneering spirit with the introduction to Nigeria of the Adstar polypropylene cement sack. The first of ten machines was installed and the Adstar bags had recorded some level of success within the cement industry. Today Bagco supplies major cement companies throughout Nigeria and have virtually completely replaced the old paper package within the polypropylene. Bagco’s newest company, Bagco Morpack Nigeria Limited (Bagco Morpack) was incorporated in 2006, based at Eric more Road, Surulere, Lagos. Bagco Morpack has been established to produce printed flexible packaging of foods and chemical industries. (Initial production which will commence in the first half 2008).

1.1.2        NATURE OF BUSINESS ACTIVITIES

Nigerian Bagco Manufacturing Company (Bagco) and Northern Bag manufacturing company both operate state of the art production units for woven polypropylene packing.

The main business of the company is the manufacturing of woven polypropylene sack used by industrial market like, cement, detergent, salt, fertilizer and flour with customize packaging solutions that meet their volume and quality requirement.

It is also used for agricultural markets, a wide variety of “super sack” and “kakaki” bags to pack grains, fruit and vegetables. And it is also used for packaging of nails and used as a shopping bag.

Bagco Group is one of largest supplier to Nigeria Independent customers of woven polypropylene bags. And Bagco Group is working hard to maintain this position as Nigeria premier quality supplier through development projects with customers that are focused on enhancing the supply chain of today and tomorrow.

1.1.3 ORGANISATION STRUCTURE

The board of BAGCO is composed of eleven (11) members made up of five (5) Executive and seven non-Executive Directors. The board members are professionals and entrepreneurs with credible track records.

Responsibilities at the top of the company are well defined and the Board is not dominated by one individual. The position of the Chairman is separate from the Chef Executive. The Chairman is not involved in the day-to-day operations of the company.

The non-executive Directors, seven (7) are of strong caliber and contribute activity to Board deliberations and decision making. However, non-Executive Directors are not appointed for a fixed period, but shall instead remain in office until the company determines their tenure or by operation of law.

The Executive Directors, the remuneration of the Chief Executive office is fixed by the board.

The board established committee is chaired by non – Executive Directors and composed of other non – Executive Director. Full disclosure is provided for Director’s remunerator. I.e. the highest paid Director and remunerator of the Chairman.

ORGANIZATIONAL CHART

Nigeria Bag manufacturing Company (BAGCO)

Board of Directors

Chairman

Managing Directors

Director Managing Director      Deputy Managing Director

(Administration)                  (Production & Technical)

Personnel Commercial  Marketing   Production    Technical

Director    Director    Director      Director      Director

Personnel  Chief       Marketing    Production   Technical

Manager Accountant  Manager      Manager     Manager

Cost         Financial        Data processing       Banking

Accountant Accountant        Manager              Manager

Wages/Salaries Manager   Chief Cashier       Assets Manager

Accounting         Accounting            Accounting

Officers             Officers                  Officers

Clerical              Clerical Officers    Clerical Officer

1.2 STATEMENT OF PROBLEM

Decision in relation to management of working capital could be seen as one of the strategic decision of a firm because it affects the operation of efficiency and a determinant of the future prospect of the firm. No matter how profitable a venture or project may be a liberal or venture may reveal situations of Under-Trading or Over-Trading. Over-trading, otherwise called under capitalization is a situation where a business tries to do too much too quick with too little working capital and liquid resources.

It is usually and ailment afflictions most firms where such firms expand beyond the capacity of their capital structure of base (Wookf, 1984).

On the other-hand, under-trading otherwise referred to as over capitalization, it is a situation where too much investment is made in working capital asset for expedient that investment in capital asset for expansion purposes are prevented. This problem however depicts a situation where afumcapital is represented by employed. (Olowe, 1997).

A company must maintain a suitable working capital position as excess or shortage of it could be detrimental to the company, despite this many companies are still lot aware of the importance of working capital as an operational requirement.

The problem of this study therefore is to determine ways by which management ensures current investment in working capital, and also watch out for the signals of the existence of these problems, with an attempt at remedying the situation through the managerial effort on working capital.

1.3 SIGNIFICANCE OF THE STUDY

An important consideration on working capital management is determines the amount of working capital and how working capital should be financed.

This study will help to know how this vital aspect at the company’s resources is being managed. This study will also highlight the benefits and problems associated with the management will therefore give an understanding of the cause and consequence of over-capitalization and under capitalization and the remedial actions necessary to overcome these problems.

More so, the study will give business organizations and ventures a revenge of understanding of how to ensure adequate, optimal and correct investment on working capital for different levels of business activities.

The effects of risk and profitability of management of working capital will be evident from the study.

In addition, this study will be of benefit to finance managers in business organizations, potential investors, student of corporate governance, other stake holders and the general public.

1.4 OBJECTIVES OF THE STUDY

Working capital management is an area that every organizations most pay serious attention to in order to meet with the dynamic business environment. The objective of the study shall specifically include the following:

1.    To identify the nature and relevance of working capital to business operations.

2.     To give an insight and understanding of the damaging effects on organization performance of lack of adequate working capital on the other hand.

3.     To show that large holding of current assets especially cash Strengthens a firm’s liquidity position but reduces the overall profitability.

4.     To find out the problems uncounted by the management in the administration of working capital and to make suggestions on how to overcome the problems.

5.     To ensure the most efficient use of resources open to the firm and it’s also involves making sure that the commitment to working capital is a low as possible.

6.     To ensure that current amounts of investment are made by firms in working capital and adequate enough to cope with the business level being operated by the firm.

7.     To know the amount to be invested in current assets and the appropriate sources from which the finance will come from.

1.5   STATEMENT OF RESEARCH QUESTION

The research questions to be used in this study are:

1.     What is the relevance of working capital for the operations to the operations of a business?

2.     Is there any industry norm, as regards the level of investment in working capital?

3.     What is the minimum required investment in working capital by an organization?

4.     What are the working capital cycle and its implication on the working capital requirement of an organization?

5.     Does the type of business being operated whether in the manufacturing or service sector affect the level of investment in the various components of working capital?

6.Can investment in working capital be kept to its bearest minimum.

1.6   RESEARCH HYPOTHESIS

The validity of the following hypothesis will be tested in this research study.

1.     That the working capital requirement of a business venture is dependent on the level of business that has been established.

Ho: The working capital requirement of a business venture is not dependent on the level of business that has been established.

Hi:The working capital requirement of a business venture is dependent on the level of the business that has been established,

2.     That excessive working capital can increase production cost.

Ho:Excessive working capital cannot increase production cost.

Hi:Excessive working can increase production cost.

3.     That the longer the working capitals cycle of an organization the greater the investment in working capital.

H0: