WeCreativez WhatsApp Support
Welcome! My name is Damaris I am online and ready to help you via WhatsApp chat. Let me know if you need my assistance.
  • Format: Ms Word Document
  • Complete project work 1-5 and
  • References & questionnaire
  • View abstract, and chapter one below

 3,000

Abstract

Working capital managemt involves the management of the most liquid resources of the firm which includes cash and cash equivalents, inventories, trade debtors and other receivables. Most firms do not ensure optimal level of working capital and this has been a major obstacle to their overall profitabilty. The study examined the impact of working capital management on the profitability of Pharmaceutical firms listed on the Nigerian Stock Exchange market. Correlation and ex-post facto research design were used in a sample of 5 Pharmaceutical firms. Secondary data for a period of 10 years (2002-2011) was used, and Ordinary Least Squares (OLS) multiple regression was employed in data analysis. The study found that working capital management (account receivables collection management, accounts payables management, inventory management, cash conversion cycle management, operating cash flow management) has a significant impact on the profitability of listed pharmaceutical firms in Nigeria. It is therefore recommended among others that managers should focus on reducing inventory days, collect receivable as soon as possible because it is better to recieve inflows sooner than later, and delay payment of creditors inorder to invest the money in short-term securities which are profitable. Also, the cash conversion cycle should be elongated to the extent that it maximizes profit.
CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The economic theory of firm requires that firm resources should be utilized efficiently in

order to achieve economic successes. Moreover, the competitive modern business

environment makes financial managers irrespective of the nature of their business to ensure

efficient utilization of firm resources. Firm resources are broadly classified into two, long-

term assets (non-current assets) and short-term assets (current assets). Therefore, there are

two major decisions in the theory of corporate financial management, that is, the long-term or

capital budgeting decision and the short-term or working capital management decision

(Pandey, 2009). Although long-term capital decisions are of critical importance to the going-

concern of a firm, workings capital management has direct consequences on the liquidity

position and the ultimate profitability of a firm (Burt & Abbate, 2009).

Working capital connotes the funds lock up in materials, work in progress, finished goods,

receivables and cash. In this regard, Khan and Jain, (2005) state that current assets are those

assets, which can be converted into cash within a short period of time, and the cash received

is again invested into these assets; hence, it is constantly receiving or circulating. Therefore,

working capital is one of the most important measurements of the financial position, which

according to Guthmann (2008) is the life-blood and nerve centre of any business entity. This

necessitated the need for the careful management of working capital in every business

organization with the value maximization objective.

Therefore, working capital management involves the application of strategies and policies in

the use of firm’s current assets and liabilities in such a way that an optimum level of working

capital is maintained. In essence, the goal of working capital management is to promote a

satisfying profitability and maximizes shareholders’ value (Li & Han-Wen, 2006). They

 

further lament that profitability is affected by the choices that companies make regarding

their working capital policies. Thus, if a firm cannot maintain an optimum level of working

capital, it is likely to become insolvent and may even be forced into bankruptcy. However,

the need for working capital to run day-to-day business activities effectively cannot be

overemphasized.

In essence, managing working capital is necessary because of its’ directs effects on the

profitability and liquidity of a corporate entity. Rehn (2012) asserts that working capital

usually refer to net working capital, the difference between current assets and current

liabilities. Thus, it involves minimizing the timing of collecting receivables, deferring the

period of payables, and keeping the minimal inventory. Moreover, working capital

management includes cash management, that is, how to invest idle cash without

compromising liquidity.

Consequently, extant literature on firm profitability and efficiency documents different

resulting effect of sub-optimal working capital management on performance and value of

firm (Deloof, 2003). According to him, efficient working capital have many effects, which

include speeds payment of short-term commitments on firms; facilitating owner financing

and it reduces working capital as a cause of firms’ failure. In addition, Osisioma, (1997) and

Wignaraja and O’Neil (1999) revealed that working capital ensures a sound liquidity for

assurance of long-term economic growth and attainment of profit generating process, and also

ensures acceptable relationship between the components of firms’ working capital for

efficient mix which guarantee capital adequacy. On the contrary, Peel and Wilson (1996),

Shin and Soenen (1998), Eljielly (2004) and Appuhami (2008) are of the view that inefficient

working capital induces firms’ failures, overtrading signs, inability to propel firm liquidity

and profitability, and loss of business due to scarcity of products.

 

However, optimal efficient working capital management is usually achieved through the

management of receivables, payables, inventory, cash conversion cycle and the operating

cycle as a whole. In this regards, Van Horne (1995) laments that accounts receivables

management involves achieving an optimal average time taken by credit customers to settle

their accounts. Moreover, since the purpose of offering credit is to maximise profitability, the

costs of debt collection should not be allowed to exceed the amounts recovered. Accounts or

trade payables management focuses on the average time taken by a company to pay its trade

payables (suppliers); it the current liabilities and all obligations, which mature within a year

such as creditors, bills payable, accrued expenses, short-term bank loan, income tax liability

and long-term debt excluding bank overdraft, all of which quickly mature in the current year

(Uyar, 2009).

Moreover, accounts payables management is used to know how much credit time received by

the firm from its trade creditors; it therefore shows the breathing time received by the firm in

terms of payment of credit purchase. Hence, the effectiveness lies in whether the firm is

enjoying the actual credit period promised by suppliers. Cash conversion cycle according to

Wang (2002) is used in measuring cash management, and it represents the interaction

between the components of working capital and the flow of cash within a company.

Similarly, it can also be used to determine the amount of cash needed for any sales level; it is

therefore a period of time between the outlay of cash on raw materials and the inflow of cash

from the sale of finished goods.

Inventory management according to Stephen (2012) especially in a manufacturing firm

consist of three components: raw material, work in progress and finished goods. He further

explain that the holding of excessive stocks will lead to tied up capital in stocks while the

holding of inadequate stock may lead to stock out costs such as lost profitability and goodwill

from customers. A firm therefore needs to set an optimal level of stock to hold. To set the

 

optimal amount of stock to hold and order, the Economic Order Quantity (E.O.Q) is usually

used (Erlenkotter, 1990).

In view of the foregoing discussions, working capital management is considered as a very

sensitive area in the field of financial management (Joshi, 1994); because it involves the

decision of the amount and composition of current assets and the financing of these assets.

Moreover, the decisions with regards the level of different working capital components

become frequent, repetitive, and time consuming. However, most firms do not hold the

correct amount of working capital and this has been a major obstacle to their overall

profitability (Stephen, 2012). This together with the current liquidity crisis has highlighted

the significance of working capital management. Because management of working capital

has profitability and liquidity implications, which requires the firm manager to reach optimal

working capital by controlling the trade-off between profitability maximization and liquidity

accurately (Raheman & Mohamed, 2007).

This study is motivated by the recent global financial crises which significantly affect the

liquidity position and the overall business activities across the world. In Nigeria, where credit

is either not available or expensive to obtain, there are corporate issues across almost all the

firms that, has to do with liquidity problem and consequently their operating performance.

Financial managers are always expected when there is a liquidity problem, to examine the

current assets and current liabilities in order to make an informed decision with regard the

profitability of their entity. In the same vein, researchers do conduct studies to examine the

relationships among the firms’ working capital components and profitability using different

methodologies.

Therefore, this study focuses on pharmaceutical companies in Nigeria; the pharmaceutical

industry manufactures and distributes drugs and medical equipment to the Nigerian populace.

Nigeria as an African nation with over 140 million citizens is known with high demand of

 

drugs and adequate health care services to address medical problems. Despite the high

demand of pharmaceutical business in Nigeria, the market is described as one of the smallest

among Middle and East African (MEA) region (Lead Capital Limited, 2008). With the

exception of a few globally recognized brands, many of the pharmaceutical companies and

health care providers in Nigeria cannot adequately compete internationally (Lead Capital

Limited, 2008). However, several effects particularly from foreign agencies and governments

are in place to improve the pharmaceutical industry in Nigeria.

However, it is necessary and logical to carry out a study on the performance in relation to the

management of working capital of the Nigerian pharmaceutical companies. The rationale is

to provide empirical evidences as to the effectiveness of the financial management of the

pharmaceutical firms, in line with the effort of improving the sector. It is against this

background that this study attempt to assess the impact of working capital management and

the profitability of listed pharmaceutical firms in Nigeria.

1.2 Statement of the Problem

One of the major objectives of working capital management is to ensure that corporate

entities have sufficient, regular and consistent cash flow to fund their activities. Therefore,

efficient working capital management could enable firms in sustaining growth which, in turn

leads to strong liquidity and profitability for ensuring effective and efficient customer

services. As such efficient management of working capital is very vital for a business

survival.

For instance, too much capital signifies inefficiency where as too little cash in hand signifies

that the survival of the business is shaky. Stephen (2012) documents evidence that most

business organizations do not hold the right amount of stocks, debtors and cash; as a result of

which the firms are unable to meet there maturing short term obligations and its upcoming

 

operational needs. Similarly, insufficient working capital means that a firm is unable to

undertake expansion projects and increase its sales, therefore limiting the growth and

profitability of the business. These are particularly the symptoms revealed by the Nigerian

pharmaceutical firms in the recent times, as majority of listed pharmaceutical firms in Nigeria

have exhibited dwindling returns as well as poor stock performance.

 

Specifically, according to Lead capital limited, (2008) drug manufactures in Nigeria are faced

with several constraints, including low capacity utilization, under capitalization, a weak

financial base, high production costs as a result of the high cost of inputs and unstable

demand among others. While efforts have been made by previous researchers to proper

solutions to these issues, little has been made to investigate the short-term liquidity problems

with respect to working capital management. Moreover, the extent to which working capital

management affects profitability of these firms is not adequately researched, this constitute

the problem of this study. And, this also led to the research question on how does the

management of working capital components impacted the profitability of listed

pharmaceutical firms in Nigeria?

However, working capital management has been empirically examine in many different

ways, while some authors studied the impact of an optimal inventory management; others

have studied the optimal way of managing accounts receivables that leads to profit

maximization (Lazaridis & Tryfonidis, 2006; Besley & Meyer, 1987). Other studies have

focused on how reduction of working capital improves a firm’s profitability (Shin & Soenen,

1998; Deloof, 2008; Raheman & Nasr, 2007; Samiloglu, 2008; Zariyawati, 2009; Falope &

Ajilore, 2009; Dong & Su, 2010; Sharma & Kumar, 2011. In summary, most of these studies

concentrated on a single working capital component and the study are mostly from the

developed economy, where the market mechanisms and the business environment

significantly differ from Nigeria. This provided a gap for this study to fill.

 

Similarly, this study used all the working capital components and examines their effect on the

profitability using a multiple linear regression model. This also differentiates this study from

the previous studies in the field of working capital management and firm performance.

 

1.3 Objectives of the study

The main objective of the study is to examine the impact of working capital management on

the profitability of listed pharmaceutical firms in Nigeria. Other specific objectives are:

  1. To investigate the impact of receivables collection management on the

profitability of listed pharmaceutical firms in Nigeria

  1. To examine the impact of inventory management on the profitability of listed

pharmaceutical firms in Nigeria.

iii. To determine the effect of accounts payable management on the profitability

of the listed pharmaceutical firms in Nigeria.

  1. To identify the impact of cash conversion circle on the profitability of listed

pharmaceutical firms in Nigeria.

  1. To determine the impact of operating cash flow on the profitability of listed

pharmaceutical firms in Nigeria.

  1. To determine the impact cash ratio on the profitability of listed pharmaceutical

firms in Nigeria.

 

1.4 Research Hypotheses

In line with the objectives of the study, the following hypotheses have been formulated:

H 01 : Receivables collection management has no significant impact on the

profitability of the listed pharmaceutical firms in Nigeria.

 

H 02 : Accounts payable management has no significant impact on the

profitability of listed pharmaceutical firms in Nigeria.

H 03 : Inventory management has no significant impact on the profitability of

listed pharmaceutical firms in Nigeria.

H 04 : Cash conversion circle has no significant impact on the profitability of

listed pharmaceutical firms in Nigeria.

H 05 : Operating cash flow has no significant impact on the profitability of listed

pharmaceutical firms in Nigeria.

H 06 : Cash ratio has no significant impact on the profitability of listed

pharmaceutical firms in Nigeria.

 

1.5 Scope of the Study

This study aims to evaluate the impact of working capital management and its main

components on the profitability of the listed pharmaceutical firms in Nigeria. The study

is restricted to all pharmaceutical firms listed on the Nigerian Stock Exchange (NSE)

market during the period 2002 to 2011. The study limits itself to the information in the

annual report and accounts of listed pharmaceutical firms for the period under review.

The dependent variable of the study is profitability, defined as the gross operating profit;

and the independent variable is working capital management measured by account

payables management, cash conversion cycle, account receivables management,

inventory management, and cash management (cash to sales ratio and cash to current

liability ratio). The study covers the period of ten (10) years (2002-2011).

 

1.6 Significance of the Study

The critical role working capital management is playing in the short-term liquidity

position and the recent crises of credit and liquidity make this study a necessity.

Therefore, this study is significant in revealing the effect of working capital management

on the profitability of pharmaceutical firms listed on the floor of Nigeria Stock Exchange.

The study’s findings may help the pharmaceutical firms in Nigeria and other companies

in general improve on their financial decision making so as to optimize the value of the

shareholders and maintain a favorable trade-off between liquidity and profitability. The

findings are also expected to be useful to Shareholders (as owners), Creditors, Managers,

and Researchers.

Shareholders as the business owners could be the primary beneficiaries of the findings

from this research, as anything affecting the value of their investments is of great

importance to them. Working capital management has the potentials of improving

profitability and the overall firm value in general; this study is design to find out the

impact of the individual working capital components on the profitability of

pharmaceutical firms in Nigeria. Thus, the shareholders of the pharmaceutical firms will

benefit from the findings of the study.

Managers of the listed pharmaceutical firms in Nigeria are also among the main

beneficiaries of the finding of this research. This is because managers are usually

interested in understanding the effects of their performance on the profitability and firm

value. Hence, this study is an attempt towards such direction. Moreover, managers will

like to know the stability of their firms’ liquidity position, particularly under

unfavourable economic conditions. On the other hand, the findings will enable businesses

 

to measure the level of safety in being able to discharge obligations in order to attain

profitability and to be prepared for unforseen events by providing cushion for such

occurences.

This study could also be of significant importance to creditors, because they are

interested in the credit worthiness of the firms in meeting their obligations, which could

only be possible

 

with efficient management of firm’s working capital. The study could be of interest to the

business community in particular and to the government of Nigeria whose concern is to

promote economic growth of the country through creation of an environment that is

conducive for business.

Lastly, students and researchers could find this study useful in that they are interested in

how theoretically related variables empirically affect each other. This study is in the same

direction, and it will also serve as sources of knowledge for the student and a point of

references for researchers.

GET COMPLETE WORK NOW

CLICK BLUE LINK TO SEARCH FOR NEW ACCOUNTING PROJECT TOPICS

GET THE COMPLETE PROJECT»

Do you need help? Talk to us right now: (+234) 08060082010, 08107932631 (Call/WhatsApp). Email: edustoreng@gmail.com.

Disclaimer: This PDF Material Content is Developed by the copyright owner to Serve as a RESEARCH GUIDE for Students to Conduct Academic Research.

You are allowed to use the original PDF Research Material Guide you will receive in the following ways:

1. As a source for additional understanding of the project topic.

2. As a source for ideas for you own academic research work (if properly referenced).

3. For PROPER paraphrasing ( see your school definition of plagiarism and acceptable paraphrase).

4. Direct citing ( if referenced properly).

Thank you so much for your respect for the authors copyright.