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CHAPTER ONE

INTRODUCTION
1.1 BACKGROUND OF THE STUDY The growth and survival of any company depends on a number of factors. Aside from the collection of talented people, working with the latest technological and mechanical asset, and the performance of a leader, the appropriate management of the financial factors that can help the company even if there is an economic crisis is also important. Any company aiming to perform well in order to achieve its long and short term goals and objectives should have a sound and effective working capital management. The ability of a company to remain in business for a very long time depends greatly on the efficient management of the components of its working capital. Thus, working capital is important to the financial health of any company of all sizes. This explains the fact that firms with inadequate working capital are in financial straitjacket. As the name implies working capital refers to the funds that are required for the day to day running of the activities of a firm, it is the excess of current assets over current liabilities. Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and
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payable, and cash. Large number of business failure has been attributed to the inability of financial managers to plan and control the current assets and current liabilities of their respective Organizations. This explains why working capital management is vital to firms with limited access to the long term capital market. Furthermore, the importance of effective working capital management cannot be over looked. Having said that working capital is the live-wire of a business, it is expected that effective provision of it will ensure greater success of a company while in-effective management of it will lead to ultimate downfall of what otherwise might be considered as a prosperous concern. As a result of the impact of working capital on the overall cost reduction and profitability of companies, this research is therefore a study of Working Capital Management as it contribute to cost reduction and improvement in profitability with particular reference to Cadbury Nigerian PLC. 1.2 STATEMENT OF THE PROBLEM Working Capital Management is a managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Generally speaking the immediate problem facing most financial managers always centers on the best way to ensure suitable survival of the business as well as its expansion in terms of working capital management.
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A firm or company should be in a sound working capital position. It should have adequate working capital to run its business operations. One should note that both excessive as well as inadequate working capital position are dangerous to any business, therefore a company is required to maintain a balance between liquidity and profitability which are sometimes conflicting objectives while conducting its day to day activities. However financial managers are faced with the major problem of obtaining an optimum level of working capital, which is a situation whereby working capital managers are able to avoid the problem of holding idle funds, which earns no profit for the firm, and inadequate working capital which reduces the firm's profitability as well as production interruptions and inefficiencies. The credit policy of a firm is another bottleneck confronting working capital management. A flexible credit policy adopted by the management in most cases results in writing off a high proportion of bad debts while a rigid credit policy reduces the level of sales and also scares away customers. Therefore financial managers are faced with the problem of determining an effective and efficient credit policy which should be in line with their company s goals and objectives. Fraud is almost in every organization and this is also a big problem to working capital managers, since working capital management requires a substantial part of the capital be held in liquid cash so as to run the day today activities of a firm, financial managers are faced with the task of providing adequate security in order to prevent embezzle of money meant for the organization.
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3 RESEARCH QUESTIONS This study intends to provide answers to the following questions: i. stock and trade creditors effectively? iv. This will form the basis for formulating the hypothesis which will be tested and validated with a view to making some recommendations. 1. Ho: Working Capital Management of Cadbury Nigeria PLC does not enhance its profitability. Has Cadbury Nigeria PLC been able to manage its trade debtors. How effective does the working capital management of Cadbury Nigeria PLC enhances its profitability? iii.Working capital policy is one of minimizing committed finance whereas working capital management is an optimizing process aimed at filling the minimization policy to operational requirement. What are the adverse effects of inefficient management of working capital on the company? 1. This implies that the inefficient and ineffective management of working capital will hinder the growth and survival of the Organization. 4 .4 RESEARCH HYPOTHESES The major area of focus of this study is on the effect of working capital management on profitability. What are the components of working capital management in Cadbury Nigeria PLC? ii. Does Cadbury Nigeria PLC has an optimum level of working capital Management? v. i.

Ho: Cadbury Nigeria PLC does not have an optimum level of Working Capital Management. v.6 SIGNIFICANCE OF THE STUDY This study is generally designed for the benefit of all investors and owners of manufacturing companies who have not adopted any 5 . iii. iv. To identify the various components of working Capital in Cadbury Nigeria PLC. Due to the importance of working capital management.5 OBJECTIVES OF THE STUDY An effective and efficient working capital management is suppose to contribute meaningfully to the development. 1. To evaluate the impact of Working Capital Management the profitability of Cadbury Nigeria PLC. ii. To determine whether Cadbury Nigeria PLC managed its trade debtors. profitability and the overall growth of any organization. 1. i. To ascertain if Cadbury Nigeria PLC has an optimum level of Working Capital Management. H1: Cadbury Nigeria PLC has an optimum level of Working Capital Management. this study is aimed at achieving the following objectives: i.H1: Working Capital Management of Cadbury Nigeria PLC enhances its profitability. To evaluate the effect of inefficient management of Working Capital in Cadbury Nigeria PLC. stocks and trade creditors effectively.

therefore proper study of the firm's working capital position must not be over looked. The study shall cover a period of five years from 2004 to 2008. Apart from the above.7 SCOPE OF THE STUDY This project is meant to cover the working capital management in manufacturing companies. Because of the importance working capital management. To the investors and owners of firms. From the research the firm's ability to finance long and short term liabilities is determined. Since investors wish to invest. financed and sound. the study will also highlight certain problems associated with the management of working capital and equally give useful information on the possible means of improvement in the university's library and for other students who may wish to embark on the research of working capital management in future. 1. the study is been conducted in other to evaluate the effect of working capital on firm s profitability. 6 .policy on working capital management. it is restricted to the general management of current assets and current liabilities. however. as a tool for cost reduction and improvement in profitability. with particular reference to Cadbury Nigeria PLC. Finally the general public may find this work useful in areas where they wish to broaden their knowledge on working capital management in business organization. a good working capital management indicates sound liquidity position of the company meaning that the company is well managed.

They include stock. v. accruals etc. Another limitation was the inability of the researcher to obtain all relevant information from the company. Loan Port Folio: Amixture of shares and bonds held by afirm.8 LIMITATION OF THE STUDY Writing a research of this nature could not be without its own predicaments. 7 . iii. Current liabilities: These are the amounts failing due to creditors within a year. Working capital: This is the capital or fund available for carrying on the day to day operations of an Organization.9 DEFFINATION OF TERMS For the purpose of this research the following term are defined as they were use in the study. iv.1. bank overdraft. this is as a result of the fact that the company cannot give out certain documents which are tagged as confidential. Working Capital Management: It refers to the efficient management of current assets and current liabilities. the researcher was highly constrained by inadequate funds which hindered him to go extra mile in search of literatures and other relevant data. however the researcher made adequate use of the available ones in other to make the project a success. debtors. prepayments etc. Thus the hardships that were encountered include: Financial constraint. It includes trade creditors. cash. ii. due to the present economic problem. 1. Current assets: These are resources that are held or consumed within a short period of time usually one year. i.

Inventories:Inventories are stocks of raw materials. worksin-progress and finished goods of a company engaged inmanufacturing operations. The company could not pay its debts andtherefore officially declare bankrupt or insolvent. Fixed Asset:Assets. plant. vii. which are not readily convertible intocash and are acquired for long term usage in the firm.g.vi. viii. machine etc. e. Bankruptcy:Where the firm is unable to meet the paymentof its debts.building. 8 .

describes working capital as the short term fund required to run a business at a particular turnover level. Working capital has also been described as that portion of capital that oils that wheel of the business since it gives the Organization the ability to pass through financial storms. opined that an Organization should ensure a good synchronization of its assets and liabilities in order to avoid business closure which poses a serious threat to its survival. Amanda (2007). there is need for adequate funds with which its day to day operations is being pursued and this becomes imperative (Madufor. inventories and provide credit to customers. defined working capital as the funds invested to finance production such as purchase of raw materials. just as circulation of blood is necessary in human body to 9 . To maximize the value of the firm has become the most prominent objectives of most Organization as against other objectives.CHAPTER TWO LITERATURE REVIEW 2.1 CONCEPT OF WORKING CAPITAL No matter how small a company is. The level of working capital an organization should maintain in order to maximize its profits has been the focus of many writers for the past few decades. The need to maintain an adequate working can hardly be questioned. a financial manager of a business entity is in a dilemma of achieving a desired tradeoff between liquidity and profitability in order to achieve its objectives. Thus. The term working capital has been viewed by different people in different ways. 2006). while Aborode (2005). Padachi (2006).

the gross concept and the net concept. He went on to say that this excess is sometimes called net working capital because some businessman considers current assets as working capital. According to Pandey (1993). which includes stocks (inventory). shared some view with Mbachu when he said that working capital is the capital available for conducting the day to day operations of an organization normally the excess of current assets over current liabilities. In his definition he opined that gross working capital simply called working capital is the firm's investments in current assets while the term net working is current asset less current liabilities.maintain life. Gross working capital: the gross working capital or current asset focuses attention on two concepts of current assets managements which include (a) Optimum investment in current assets and (b) Financial current assets. 10 . The concept of gross working capital advocates that a firm should posses working capital just adequate and sufficient to meet the firm s operating cycle. opined that working capital is used to denote the excess of current assets over current liabilities. Mbachu (1988). rather they have equal significance from management view point. short-term investment etc. Osibodu (1990). there are two concept of working capital. bank and cash balance. Gross working capital is the totality of the current assets of the Organization. However. the flow of funds in an Organization is very vital to enable it grow and survive. debtors. the two concept of working capital gross and net are not exclusive. It ensures that excess investment in cash is avoided.

The concept advocates a finance of working capital by permanent sources of funds. preference shares. retained earnings etc. This made Pandey (1993). This is otherwise known as optimal level in current assets. However. The net working capital is a qualitative concept. long-term debts. Net working capital:this is quantified as the excess of total current assets over total current liabilities. It emphasizes continuous liquidity of the firm.since excess investment in cash results in excess liquidity. Thus working capital represents the money required for the purchase of raw materials. Excess investment in current assets is avoided. wages and other expenses and for financing the interval between the data of supply of goods and data of receipts of payment for those goods. to stipulate that both concepts are not exclusive but rather they have equal significance from management point of view. The data and problems of each organization should be analyzed to determine the amount of working capital needed. He was also of the opinion that there is no precise way to determine the extent of amount of gross or net working capital for every firm. payment of salaries. excessive and inadequate investment 11 . the two concepts Gross and Net Working Capital are of paramount importance to management. debentures. The consideration for the level of investment in current assets should avoid two danger points. Examples are shares. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. thus resulting to high cost of income.

Inadequate amount of working capital can threaten the solvency of the firm if it fails to meet its current obligations. the other aspect of the gross working capital points to the need for arranging funds to finance current assets. It should be realized that the working needs of the firm may be fluctuating with changing business activities.in the current assets. Investment in current asset should be just adequate. This may cause excess or shortage of working capital frequently. Secondly. the financial manager should have knowledge of the sources of working capital funds as well as the investment avenues where the idle funds may be temporarily invested. There is no precise way to determine the exact amount of gross and net working capital for every firm. Keeping in view the 12 . Similarly if some surplus funds arise. Thus. The data and problems of each company should be analyzed to determine the amount of working capital. Finally. There is no specific rule in which current assets should be determined or financed. but should be invested in short term securities. It is not feasible in practice to finance current assets by short term sources only. The management should be too prompt to initiate an action and correct the imbalance. they should not be allowed to remain idle. it may be emphasized that gross and net concepts of working capital are two important facets of working capital management. not more or less the needs of the business firms within the industries. Whenever a need for working capital funds arises due to the increasing level of business activities or for any other reason the arrangement should be made quickly.

Working capital management requires much of financial managers time. For a distribution company. For one thing. repetitive and time consuming which makes the working capital part of the firm s profitability (Raheman and Nasr. However firm with too few current asset may incur shortage and difficulties maintaining smooth operations. In addition. There are many aspects of working capital management which makes it an important function of the financial manager. relating to current 13 . Empirical observation showed that financial managers have to spend much of their time to the daily internally operations.2 IMPOTANCEANCE OF WORKING CAPITAL MANAGEMENT Working capital management is a very important component of corporate finance because it directly affect the liquidity and profitability of a company. they account for even more.constraints of the individual company a judicious mix of long term financing should be invested in current assets. An efficient working management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet due short term obligation on the one hand and avoid excessive investment on the other hand. 2007). 2. Working capital management is important due to many reasons. the current asset of many manufacturing firms accounts for over half of its total assets. It deals with current asset and current liability. working capital decision are sensitive in the financial area but the level of different working capital components becomes frequent. Excessive level of current assets can easily result in a firm realizing a substandard return on investment.

) Specific controls over the individual elements of working capital stocks. It should be noted that the 14 .) Provision of funds to finance current assets. Alex Mbachu assert that. Working Capital represents a large portion of the total investment in assets. the more financial resources organization needs and working capital management is concerned with keeping the operating cycle to its shortest length ". Current assets represent more than half the total assets of business firms.) (ii. cash debtors and creditors. In assessing the working capital needs of an organization. Determination of optimum level of working capital to be kept. The management of working capital involves the following. (iii. The fundamental concept in assessing the working capital needs of an organization is the operating cycle of the organization and the firm's sales activities. inventory into receivables and receivables ultimately into cash. because they represent a large investment and because this investment tend to be relatively volatile current assets are worthy of financial managers careful attention.assets and current liabilities of the firm.3 THE NEED FOR WORKING CAPITAL The need for working capital to run the day to day business activities of a firm cannot be over-emphasized. The operating cycle for manufacturing organization is longer than that of marketing organizations. The normal operating cycle referred to is the time required for cash to be converted into inventory. (i. Because of this it is necessary to get maximum benefits. "the longer the operating cycle. 2.

2. firm's credit policy. the need for working capital is directly related to sales growth. through the satisfaction of human wants. profit margin and profit appropriation. As Sales grow. These need become very frequent and fast when sales grow continuously. The income of enterprise. availability of credit firm's growth and expansion activities. Profit is necessary for a company to insure its own survival. A business which does not earn profit cannot stay in the market for a longer period. business fluctuation. The financial manager should be aware of such needs and finance them quickly. growth and expansion. In the Words of Drucker. Amongst the factors are: the nature and size of business. the problem of any 15 . production policy. However. a number of factors influence the working capital needs of firms. The only problem here is that of estimating the satisfactory level of working capital items required. manufacturing cycle.4 PROFIT AS A MEASURE OF FIRMS PERFORMANCE The primary objective of business is to produce and sell goods for profit. Furthermore. changes and finally operating efficiency of firms. By using relationship between sales and the relevant items of working capital an estimate can be obtained of the working capital required to finance a given level of sales. price level.operating cycle per se does not give the amount of working capital needed but serves as a useful indicator of efficient utilization of resources. therefore. must exceed expenditure over a period of time. the firm needs to invest more inventories and book debts.

to know its profits for income tax purposes. From the foregoing it could be seen that the main objective of a business organization is to make profit and thus it serves as a good parameter for measuring firms performances. to show a prospective buyer or may be.5 COMPONENTS OF WORKING CAPITAL The components of working capital are generally classified into two broad categories namely. usually the main reason why the business was set up in the first place. Current assets and Current liabilities. and the proprietor will want to know for various reasons how much profit has been made".business is not the maximization of profit but the achievement of sufficient profit to cover the risk of economic activities and thus to avoid losses . The business organization would want to know its profits for diverse reasons as to assist it plan ahead. to help it obtain loan from creditors. 2. Business organization will also want to maximize their shareholders wealth and the extent to which this wealth maximized depends on how much profit is made. 16 . Again one of the major characteristics of a commercial organization is profit motive since "the earning of profit is after all. It is clear from the above definition that a business enterprise should work for reasonable profit which should cover its own future risk.

investments in inventories by most companies are usually substantial and in general accounts for about one third of total assets". Management of Inventory Bealey and Stewart (1981) defined inventory as "the stick of the product a company is manufacturing for sale and the components that make up the product".1 MANAGEMENT OF CURRENT ASSETS William Pickless (1982). These assets includes.2. inventory provides safety stock in case. work-in-progress or finished goods awaiting sale. These inventories provide very crucial links between the production (Raw materials) and sales (partially processed and finished goods) efforts of companies by enabling them to offer the best type of customer service at minimum cost. Apart from this feature. that is to say they are easily convertible into cash. inventory is made available to meet future 17 . raw materials. i.5. interruptions in production occur. In this direction. Inventory (Stock). defined current assets as those assets which are made or acquired and merely held for a short period of time. However inventory is considered important from three perspectives namely. And sometimes. it makes available a balance of inflows and outflows of stock throughout production period. production is not entirely meant for immediate consumption instead a future need is anticipated. Cash. Such inventories are stated as follows. Secondly. with a view to sale at a profit in the ordinary course of business. Management of current assets involves the problem of determining the optimum level of investment in cash asset. Debtors and Marketable Securities.

Management of Cash Cash as one of the component of current asset form a crucial portion of working capital structure of a company. business or firms have three primary motives for holding cash. a reasonable cash balance is kept to pay of current liabilities monthly when they fall due. The aim of cash management is to maintain adequate cash balance in order to keep the firm sufficiently liquid and to invest excess cash in some profitable ventures. precautionary and speculative motives. Thus. ii. The presence or absent of cash in a business concern tells how liquid the it is or the extent of its illiquidity.growth needs of a firm. A company needs to keep sufficient cash to keep its business running smoothly. Samuelson (1989). Generally. Thus. Inadequate cash will disrupt the firm s operation and can lead to insolvency. they include. For these reasons. The management of cash is concerned with managing the cash flows into and out of the firm. transaction. the aim of inventory management should be to avoid excessive and inadequate levels of inventories and to maintain sufficient inventory for the smooth production and sales operations. According to Olowo (1998). According to Lord Keynes in Paul A. a firm needs to maintain sound cash position. cash flows within the firm and cash balances held by firms at a point in time. proper inventory planning is very important and normally forms part of the budgetary process. excessive cash will tie down the unnecessarily long term capital with a result that either return on capital will be low. 18 .

However. Management of Debtors Debt management otherwise known as management of account receivable is concerned with the efficient management of debtors to achieve an optimum level of debt in the firm¶s working capital 19 . firms must decide the quantum of transactions and precautionary balances to be held. the primary motives to hold cash and marketable securities are the transactions and precautionary motives. Precautionary Motive:Precautionary motive is the need to hold cash to meet any contingencies in future. According to Richard Lipsey (1993). the precautionary demand arises from uncertainty about the degree of non synchronization.Transaction Motives: The transaction motive requires a firm to hold cash to conduct its business in ordinary course. Therefore the transaction motive mainly refers to holding cash to meet anticipated payments where timing is not properly matched with cash receipts. Speculation is always made on securities. iii. whereas the transaction demand arises from the certainty of non synchronization of payments and receipts. the transactions demand for money arises because of the iron synchronization of payments and receipts. Lipsey was of the view that. It provides caution or buffer to withstand unexpected emergency. Speculative Motive:The speculative motive relates to the holding of cash for investing in profit making opportunities as and when they arise. Thus.

this is due to the fact that such debt are tied down capital and could impact negatively on the liquidity of the firm. firms can significantly enhanced their cash flows if the amounts owed to the business are collected faster. systematic demand procedure. asserts that. Managing debtors is a problem of balancing liquidity and profitability. how long it is being owed and for what it is owed. while too rigid credit policy may lead a firm into losing its goodwill and customers. A good policy seeks to strike a reasonable balance between sales. Debtors include accounts receivables as such its importance to the firm cannot be over emphasized. proper legal enforcement method on the credit extended to customers. On the other hand. The failure of most organization could be attributed to the problem of liquidity arising from extended credit terms and the resulting cash flow problem. how much is owed. The effective and efficient management of accounts receivable should therefore deal with establishing viable credit and collection policies. Planware (2006).investment. 20 . bad debts and losses. Thus. Thus every business needs to know who owes them money. This is as a result of the fact that there is no sound credit management system which sets the credit limit. sales may be lost or reduced if no credit is allowed to customers whose paying ability is in little. business operations can go uninterrupted without credit being allowed to customers since it is necessary as the initial capital needed to start a business. A collection policy should be designed to keep the level of investments in receivables at appropriate level.

collection received in advance of delivery of goods or performance of service or debts. There is a close relationship between cash and market securities. properly classified as current assets or the creation of other current liabilities.iv. Management of Creditors Credit management otherwise known as management of account payable is concerned with short term credit financing.5. tax and other expenses. In general current liabilities include the following: Creditors. Firms sometimes report reasonable amounts of such short term marketable securities as treasury bills.2 MANAGEMENT OF CURRENT LIABILITIES Current liabilities are obligation that must be paid within the operating cycle or within one year. bank loan and over draft. Creditors are a vital part of the component of working capital and should be managed in an efficient and effective way to enhance 21 . Therefore. i. One firm s trade debtors are another firm s trade creditors. The management of trade creditor is the mirror image of the management of trade debtors. the investment in marketable securities should be properly managed. 2. Mbachu (1990). Current liabilities include such obligation as account in acquisition of materials. Management of Marketable Securities These are securities that can be sold in short notice for close to their quoted market prices. or bank certificates of deposit among their current assets. termed current liabilities as principal obligations whose liquidity is reasonably expected to require the use of existing resources.

This is because a good supplier is one who will work with you to enhance the future viability and profitability of a company. a company should avoid delaying trade credit unnecessary so as not to lose loose supplier s goodwill. if the supplier offers a cash discount and the firm do not take advantage of it. Bank Overdraft and Other Short Term Funds A bank overdraft is one of the most common forms of short-term finance. Trade credit as a discount policy is an important source of free financing. the management of creditors ad suppliers is just as the management of your debtors. A firm in managing its trade creditors should attempt to obtain satisfactory credit periods from suppliers. However. But it attracts a relatively high interest rate so it should only be used until the normal trading cycle eliminates the temporary cash shortfall. It is really a loan arrangement whereby a trading bank allows a business (grants an overdraft facility) to make payments from its current banking account and put the account into 'debit' up to an agreed limit. However. there is an implied interest cost of credit. A bank overdraft is part of working capital and is reported in the position statement as a current liability. It is a flexible source of finance as it fluctuates according to the firm's needs and the business can pay in or withdraw cash when convenient. ii. Thus. However. 22 .the firm s cash position. care must be taken to maintain good relationships with regular and important suppliers.

iii.

Taxation Management Proper taxation management an organisation contributes to the

financial management performance of the Government. In addition to minimising the risk of the financial cost of non-compliance, it reduces negative non-financial impacts, such as adverse publicity or loss of public confidence in the organisation s financial management. Taxation management is closely aligns with risk management. Some risks associated with poor taxation management include incorrect treatment of receipts and payments, lost input tax credits, loss of Agency credibility and impact on Headline Budget Measures. 2.6 WORKING CAPITAL RATIOS Ratio analysis is the tool with which financial statement are analyzed. The use of ratios is indispensable if the strengths and weaknesses or the firm must be ascertained, improved upon and corrected. Osisioma (1990) defined ratio analysis as "the technique of reducing aggregate financial data into meaningful ratios for the purpose of obtaining measures of liquidity, solvency, stability and profitability". John V. (1972) had it that, "ratio analysis is the process of identifying the financial strengths and weakness of the firm by properly establishing relationships between the items of the balance sheet and profit and loss account". Thus financial ratio relates one set of values to another, with the resulting quietness serving as a measure, a standard or a room by which performance is judged. It is useful to classify ratios into four fundamental types with emphasis on working capital management. Liquidity Ratio: This
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measures the firm's ability to meet its maturing short term obligations. Among these are: i. Current Ratio:Which indicates the extent to which the claims of short term creditors are covered by current assets? ii. Acid Test Ratio:Which measures the firm s ability to pay off short term obligations without relying on the sale of inventories? iii. Leverage Ratio:This ratio measures the extent to which the firm has been financed by debt. iv. Activity Ratio:This measures management overall effectiveness as shown by the returns generated on sales and investment. Examples are: (a) Net profit on sales ratio - which gives profit per naira of sales. (b) Rate of Return on assets - which measures the return on total investments in the firm. (c) Rate of Return on capital employed - which is an efficiency guard to show the intensity and profitability of overall capital usage 2.7 FACTORS AFFECTING WORKING CAPITAL Firms maintain different levels of working Capital which invariably influences the level of liquidity position of the organization. This is as a result of the fact that the level of working capital requirements in these firms are influenced by many factors and these are: i. The Business Environment The environment of the business represents the total of surrounding factors which affects the operations of business. The
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factors are economic, political, legal, socio cultural, technological, customers etc. Example, if the economy is in boom era, the business might require investment in stocks. ii. The Nature and Size of the Business The working capital requirement of a firm is a function of the nature of such firm which is different from that of another firm. Large manufacturing firm like Cadbury Nig. Plc require high working capital due to its carrying a large stock of variety of goods. iii. Firm s Credit Policy The more efficient the company s credit policy, the lesser the operating cycle and the lower the working capital required. The credit policy is measured by ability to reduce the operating cycle without any side effect on the goodwill of the company in terms of relationship with the customers. iv. Operating Cycle All things being equal, the longer the operating cycle, the larger the working capital required for the period. Hence, reducing the operating cycle means reduction in the amount of working capital needed. v. Price Level Changes The price of commodities has a direct effect on working capital needed. During inflationary periods, firms will require not only investment in fixed assets but also in working capital. vi. Operating Efficiency The ability of a company to keep its costs at minimum and
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There are some festive periods when demand increase also the working capital needed to meet this demand will increase. The relation between profitability and liquidity was examined.8 STUDIES ON WORKING CAPITAL Many researchers have studied working capital from different views and in different environments. On the other hand. vii. increase in running costs means increase in working Capital needs of the company. First. Eljelly (2004). Business Fluctuation Movement of sales determines the working capital requirements of the company. The following ones were very interesting and useful for this research. The study found that the cash conversion cycle was of more importance as a measure of liquidity than the current ratio that affects profitability. elucidated that efficient liquidity management involves planning and controlling current assets and current liabilities in such a manner that eliminates the risk of inability to meet due short-term obligations and avoids excessive investment in these assets. The size variable was found to have significant effect on profitability at the industry level.reasonable level means the reduction in working capital needs of such company. 2. it was clear that there was a negative relationship between profitability and liquidity indicators such as 26 . as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia using correlation and regression analysis. The results were stable and had important implications for liquidity management in various Saudi companies.

Deloof (2003) discussed that most firms had a large amount of cash invested in working capital. For measuring the efficiency of working capital management. Ghosh and Maji (2003). performance. Findings of the study indicated that the Indian Cement Industry as a whole did not perform 27 . utilization. Using correlation and regression tests he found a significant negative relationship between gross operating income and the number of days accounts receivable. inventories and accounts payable of Belgian firms. the study also revealed that there was great variation among industries with respect to the significant measure of liquidity. Setting industry norms as target-efficiency levels of the individual firms. in their paper made an attempt to examine the efficiency of working capital management of the Indian cement companies during 1992 1993 to 2001 2002. and overall efficiency indices were calculated instead of using some common working capital management ratios.current ratio and cash gap in the Saudi sample examined. It can therefore be expected that the way in which working capital is managed will have a significant impact on profitability of those firms. Second. this paper also tested the speed of achieving that target level of efficiency by an individual firm during the period of study. On basis of these results he suggested that managers could create value for their shareholders by reducing the number of days accounts receivable and inventories to a reasonable minimum. The negative relationship between accounts payable and profitability is consistent with the view that less profitable firms wait longer to pay their bills.

shorter net trade cycles were associated with higher risk adjusted stock returns. by industry and capital intensity. The way working capital was managed had a significant impact on both profitability and liquidity. highlighted that efficient Working Capital Management (WCM) was very important for creating value for the shareholders. The problem arose because the maximization of the firm's returns could seriously threaten its liquidity. They found a strong negative relationship between lengths of the firm s net trading Cycle and its profitability.remarkably well during this period. corporate profitability and risk adjusted stock return was examined using correlation and regression analysis. Results indicated that there were no significant differences amongst the years with respect to the independent variables. The problem under investigation was to establish whether the more recently developed alternative working capital concepts showed improved association with return on investment to that of traditional working capital ratios or not. and the pursuit of liquidity had a tendency to dilute returns. The results of their stepwise 28 . This article evaluated the association between traditional and alternative working capital measures and return on investment (ROI). specifically in industrial firms listed on the Johannesburg Stock Exchange (JSE). Shin and Soenen (1998). The relationship between the length of Net Trading Cycle. Smith and Begemann. (1997) emphasized that those who promoted working capital theory shared that profitability and liquidity comprised the salient goals of working capital management. In addition.

displayed the greatest associations with return on investment. Well known liquidity concepts such as the current and quick ratios registered insignificant associations whilst only one of the newer working capital concepts.regression corroborated that total current liabilities divided by funds flow accounted for most of the variability in Return on Investment (ROI). The origin of the business stretches back to the 50 s. 2. indicated significant associations with return on investment. The statistical test results showed that a traditional working capital leverage ratio. They also give us the results and conclusions of those researches already conducted on the same area for different countries and environment from different aspects. current liabilities divided by funds flow. we have developed our own methodology for research. All the above studies provide us a solid base and give us idea regarding working capital management and its components. the comprehensive liquidity index. first as an activity to source cocoa beans. On basis of these researches done in different Countries. food drink and food products whose quality and brands are enjoyed throughout the entire nation as well as in our export markets around the world. An initial packing operation established in the early 60 s to pack imported bulk consumer products 29 grew rapidly into a . while simultaneously prospecting for opportunities to serve the local consumers with the famous Cadbury products.9 HISTORICAL BACKGROUND OF CADBURY NIGERIA PLC Cadbury Nigeria Plc is a leading company in confectionary.

skill. suppliers. human rights. their pioneering cereal conversion plant processes nearly 30 . products. Tom-Tom (big black sweet with white stripe). These carefully nurtured traditions enabled the company provide brands. employees and society at large. malta sweet and a host of others. This heritage of caring has been the underlying principle that governs their relationship with consumers. The philosophy of the business from inception was to build and sustain a solid foundation for providing functional and affordable products that help enhance the quality of life of consumers. Today. knowledge and other intelligent property behind the success of the business.full-fledgedmanufacturing outfit. safety at work. while developing a mutually beneficial relationship with the wider community in which it operates. shareholders. customers. Butter mint. Cadbury has a broad portfolio of well established product many of which were developed locally. They are the embodiment of talents. Trebor Peppermint Original (TPO). The company was incorporated in January 1965 when the current four (4) hectare factory site was also opened and subsequently went public in 1976. ethical trading. These include: Cadbury Bourn vita (The lead brand). as well as the company s policies on the environment. financial results and manpower capacity of less than 200 to over 2000 employees who have chosen to make a career in Cadbury. corporate governance. Richoco (Rich chocolate drink). As part of their effort to use local raw materials as much as possible. diversity and equal opportunity employment practices.

A rising profile of performance. driven by a robust business model also means increasing taxes to Government.000 tons of sorghum grains annually. into glucose and malt extract primarily to feed the confectionary and food drinks plant. Cadbury also made a major investment to establish a cocoa performance that meets the interests of their numerous stakeholders. 31 .30.

CHAPTER THREE RESEARCH METHODOLOGY 3. middle and junior level staffs.1 METHOD OF DATA COLLECTION Data for this study were collected from both primary and secondary sources. For the purpose of gathering information that could not be obtained through the secondary data. The reason for using the questionnaire was to enable the researcher to collect information that could not be obtained from the Annual Accounts of the company. The questionnaire consists of a set of questions designed by the researcher in relation to the research topic and administered to all the relevant personnelinvolved in the administration of the company working capital. The method of data analysis for this research will be the use 32 . The secondary source constituted of existing literature and data extracted from the Annual Reports and Accounts of Cadbury Nigeria PLC mainly the profit and loss and balance sheet statements for five years period from 2004 to 2008 were used in gathering financial data and computing various ratios used in answering the research questions and testing the hypotheses. 3. the use of tables will be employed. the primary source of data collection was employed using basically the questionnaire.2 METHOD OF DATA ANALYSIS In the presentation of data collected. A total number of forty (40) questionnaires were distributed to the staff of the company drawn from both the senior.

Stock Current Liabilities Closing Stock x 365 Sales Stock Turnover = Debtors collection period = Trade Debtors x 365 Sales Creditors payment period = Trade Creditors x 365 Cost of sales Returns on working capital = Profit before interest and tax x 100 Working Capital In testing the hypotheses. The formula is given as: r= xy . two statistical techniques will be used.x( y) [n x2 -( x)2] [n y2 .( y)2] 33 . that is the Correlation coefficient and the Chi-square statistical technique. The reason for using this method is to enable the researcher compare and group information and data accordingly.of simple percentages and ratio analysis. Hypothesis one (H1) will be tested using correlation coefficient (r) in order to test the relationship between working capital and profitability. The computation of ratios shall be limited to those that have to do with working capital of the company. These ratios include: Current ratio = Current Assets Current Liabilities Acid test ratio = Current Assets .

The formula is given by: Xc2 =(O E Where: E)2 Xc2 =Calculated Chi-square O =Observed frequency E = Expected frequency derived by (CT)(RT) GT Where: CT = Column total RT = Row total GT = Grand total This tool will be applied by checking the corresponding chi-square table (Xt2) with the degree of freedom calculated as (r-1)(c-1) under 5% level of significance. 34 .While Hypothesis two (H2) will be tested using Chi-square statistical technique in order to test the optimum level of working capital management in Cadbury Nigeria PLC.

the primary and the secondary data. they include the current assets and the current liability. 35 .1 Components of working capital in Cadbury Nigeria PLC There are two components of working capital in Cadbury Nigeria PLC.CHAPTER FOUR DATA PRESENTATION AND ANALYSIS 4. all directed towards determining the effect of working capital management on the profitability of Cadbury Nigeria PLC. The first three (3) research questions will be answered using the secondary data obtained from Cadbury Nigeria PLC annual account from 2004 to 2008. they helped to highlight the working capital position of the firm. However the presentation of data will only focus on the secondary data while the primary data will be presented along with its analysis under the data analysis subsection.1. These components of working capital are presented in the tables below. that is. 4. there are two types of data collected for the purpose of this study. while the other two (2) research questions will be answered using the primary data obtained through questionnaire. Five research questions were formulated in this study.1 DATA PRESENTATION As earlier stated in chapter three. The following secondary data presented below constitute the working capital variables.

433 3.365 7.293 2. prepayment.661 7.390 13.023 2.570 15.480 1. PLC (2004-2008).699 2.911 4.150 Nm 545 750 7 7 1 Nm 4.130 3.985 5.554 Nm 13. It also shows the constituents of the company s current assets which include stocks.336 Nm 9.075 15.457 20. *(N m) All values in billions Table 4.Table 4.397 Nm 32 190 16 85 59 Nm 773 470 1.399 1.901 6.2: Current Liabilities Years Bank overdraft Trade Creditors Nm 2.604 7.882 22.447 1.466 22.528 16.029 9.774 Total Source: Annual Accounts of Cadbury Nig.361 2. Table 4.879 2. and amount due from subsidiary and cash in hand and at bank.056 1.951 Nm 5.174 2.019 12. shows the current asset of Cadbury Nigeria PLC for the five years starting from 2004 to 2005.570 813 Bank & Cash Nm 2.029 5.055 1.202 Source: Annual Accounts of Cadbury Nig.715 36 Taxation Other Liabilities Total Borrowing Nm 2004 2005 2006 2007 2008 2. debtors.1: Current Assets Years Stock Debtors Prepayment Due from Subsidiary Nm 2004 2005 2006 2007 2008 4.407 22.981 3. *(N m) All values in billions .623 2.1. PLC (2004-2008).419 3.

3 shows the computation of working capital in Cadbury Nigeria PLC. *(N m) All values in billions 2005 Nm 22. PLC (2004-2008). This indicates that the company was able to settle its immediate obligations. the Working capital of the company and Profit Before Interest and Tax (PBIT) will be used in computing the correlation in order to ascertain the type of relationship that exist between them.016) (12.365 2008 Nm 7. It also shows the constituents of the company s current liability which include bank overdraft and short term borrowing.407 (9.466) (22. Table 4.508 (8.1.391 9.604 2007 Nm 7.390 2006 Nm 13. taxation.457) (20.428) Table 4. and other liabilities which include accruals and dividend payable.2.202) 4.Table 4.2 Relationship between working capital and profitability In determining the relationship of working capital management on the profit of Cadbury Nigeria PLC. 37 .774 13.101) (14. 4. However in 2006.3: Computation of working capital Years 2004 Nm Current Asset Current Liability Working Capital Source: Annual Accounts of Cadbury Nig. trade creditor.882) (22.853) (13. shows the current liability of Cadbury Nigeria PLC for the five years starting from 2004 to 2005. As it can be seen the working capital of the company in 2004 and 2005 were in a positive position.

38 .4: Working capital and PBIT Years 2004 Nm PBIT Working capital Source: Annual Accounts of Cadbury Nig. The PBIT in 2005 was a bit higher than that of 2004.891 4.461) (13. Table 4. 4. shows the Profit Before Interest and Tax compared with working capital of the company. The following are the data to be used in computing the ratios. but from 2006 to 2008 the company made losses.101) 2008 Nm (1. PLC (2004-2008).841) (8. these ratios include stock turnover.428) 3. Debtors and Creditors In other to determine if the company is utilizing its recourses efficiently.1.3 Management of Stocks. Looking at the PBIT compared to the working capital.853) 2007 Nm (2.4.2007 and 2008 the company s working capital were in a negative position making it difficult for the company to meet its immediate obligations. it can be easily seen that when the PBIT of the company were positive the working capital were positive but when the PBIT were negative the working capital of the company were also negative. *(N m) All values in billions 2005 Nm 3.320) (14.508 2006 Nm (1.937 9.391 Table 4. the efficiency ratios will be computed. debtor s collection period and creditor s payment period.

084 Nm 4.901 27. PLC (2004-2008). Table 4.447 9.7: Management of Creditors Years Trade Creditors Cost of Sale 2004 Nm 2.983 2007 Nm 1.399 13.444 2006 Nm 6.Table 4.727 Source: Annual Accounts of Cadbury Nig. *(N m) All values in billions Table 4.445 2008 Nm 1.298 2007 Nm 1.055 16. These data will be employed in calculating the number of days it takes for the company to collect money from its debtors.715 15.361 18.727 Source: Annual Accounts of Cadbury Nig.465 2006 Nm 2.911 20.174 16. PLC (2004-2008).623 17. *(N m) All values in billions Table 4.130 27.7. Table 4.6: Management of Debtors Years 2004 2005 2006 Nm Trade Debtors Sales 5.084 Nm 9. shows the trade creditors and the cost of sales value of 39 .018 2008 Nm 2397 21.018 2008 Nm 2.021 Source: Annual Accounts of Cadbury Nig. *(N m) All values in billions Table 4.444 Nm 3.5: Management of Stock Years 2004 2005 Nm Stock Sales 4.029 20.265 2005 Nm 2.023 12. shows the trade debtors and the sales value of the company.293 18. shows the stocks and the sales value of the company. PLC (2004-2008).6. These data will be employed in calculating the stock turnover ratio and the number of days stocks are held in the company.298 2007 Nm 2.951 21.5.

1 1.4 31. 4.6 21. 4.1 The table above shows the percentages of various items that make up the current asset of the company.9 20 % 100 100 100 100 100 Total Source: Computed from Table 4. percentages and financial ratios will be computed and thereafter the interpretation shall follow. The table shows that 40 .5 30. The reason for using this method was because.5 40.5 18.9 0. These data will be employed in calculating the number of days it takes the company to pay its creditors.9 45.9 34.3 10. Table 4.1 27.4 Bank & Cash % 19.2.2 0.8: Current Assets Analysis (%) Years Stock Debtors Prepayment Due from Subsidiary % 2004 2005 2006 2007 2008 36.9 21.8 22.3 21. financial ratio is largely concerned with the efficiency and electiveness of resources utilization by the company's management and also with the financial stability of the company.1 10.1 38 % 37.2 0.the company.8 % 5.8 % 0.1 Component of Working Capital Analysis The percentage of individual working capital components of Cadbury Nigeria PLC are computed below together with their interpretation starting with current assets.2 DATA ANALYSIS (SECONDARY DATA) In analyzing the secondary data.8 2.

6 68. 2004 had the lowest proportion with 19.2 41 .4 10.5% and 40.7 73.9 6.9: Current Liabilities Analysis (%) Years Bank overdraft Trade Creditors % 22. which represent 45.9 15.8% in 2004.3% in 2007 and later reduced to 10. The proportion of the amount due from subsidiaries was 5. increase in 2005 to 0.9%.4% in 2006. the majority of the current asset value was held in stocks.9%. While in 2006.1% in2005.8 7. Table 4. 2007 and 2008.5 42. The proportion of cash in hand and bank were held moderately in all the years under review.Cadbury Nigeria PLC in 2004 and 2005 held most of its current asset in debtor s value representing 37.1 Taxation Other Liabilities % 49 30.2% in 2004.8% respectively.2% and finally reduced to 0. however in 2006 it reduce to 0. while 2005 had the highest proportion with 34.1 5.1 0.5 24 % 100 100 100 100 100 Total & Borrowing % 2004 2005 2006 2007 2008 22. reduced to 2.1% in 2007 and 38% in 2008.1 0. 31.4 20.1% but in 2007 the value increased to 1. Prepayment has the lowest proportion of current asset in all the five years under review.8 0. Prepayment was 0.8% in 2008.7 % 6.4 in 2008.9 73.3 19.2 Source: Computed from Table 4.3% of current asset. increased to 21.

In analyzing the liquidity position of Cadbury Nigeria PLC.2. Looking at the table closely. however in 2006 it further reduce to10. bank overdraft and other short term borrowing has the highest proportion with 42. 42 . shows the current liabilities of the company which consist of bank overdraft and other short term borrowing.9%.2007 and 2008. Taxation in 2004 and 2005 were 6. 73.1% for 2004.9%.1% and 5. acid test ratios and returns on working capital will be computed.2 Liquidity Ratio Analysis The liquidity ratio tries to assess the liquidity or solvency position of a company.Table 4. the current ratios. the proportion of tax were not up to one percent of the company /s current liabilities. trade creditors. while in 2006. 2007 and 2008. while taxation has the lowest proportion with 6.4% in 2005. the proportion reduce to 6. 4. Trade creditors was 22.8%. taxation and other liabilities. reduced slightly to 20.8% in 2007 and finally increase a little in 2008 to 7. this might be as a result of the losses the company made those three years. In the years 2005.7%.2% respectively. it can be seen that Cadbury Nigeria PLC has 49% of its current asset in 2004 in other liabilities which has the highest proportion of current asset in that year.6% and 68.4% in 2004. 2006.7% 73.9.

2007 and 2008.4:1 2008 0.94:1 2005 1.Table 4.33:1 2007 0.22:1 Source: Computed from Table 4. The ratio gives a better view of the liquidity position of a company since inventories are said to be the least liquid of a firm's current assets and the assets on which losses are likely to occur in event of liquidation.36:1 2006 0. Table 4.3:1 Source: Computed from Table 4. showed the tabulated values of the 43 . Table4.10: Current Ratio Years Current Ratio 2004 1.2 The acid test ratio indicates the ability of the company to met its short term liabilities from its current assets without having to sell inventories. A glance at the ratios between the periods under review portrayed poor working capital management. such that cash and near cash resources were so depleted that maturing business obligations could not be met.5:1 2005 1.11.6:1 2007 0.11: Acid Test Years Acid Test 2004 0.25:1 2008 0. the current liabilities were more than the current assets of the company. This might be as a result of the company over investing its liquid resources in illiquid assets.1 and 4.2 Current ratio compares total asset and total liabilities and is intended to indicate whether there are sufficient short term assets to meet the short term liabilities. In fact.7:1 2006 0. in 2006. This was because the company s current assets over the years under reviews were below the industry average of 2 times the current liabilities.1 and 4.

Table 4. that it was only in 2005 that the company s current asset (less inventories) was a bit higher than the current liabilities.12 indicates that the returns on working capital was 88. because of the bad acid test ratios.3 Efficiency Ratio Analysis The efficiency ratios indicate the efficient utilization and management of a company s recourses. debtors collection period and creditor s payment period.61 % 41.15 Source: Computed from Table 4.12: Returns on Working Capital Years 2004 2005 2006 % Returns on Working Capital 88.78% hand finally reduced to 9.8% in 2006.41% in 2005. Unlike the current asset already analyzed the acid test ratios shows.67% in 2004. there was also a further reduction in 2007 to 18.acid test ratios.8 2007 % 18.41 % 20. 2007 and 2008 the company s credit worthiness would be endangered as it might not be able to meet emergency payments of its short-term liabilities. while in 2004. The efficiency ratios to be computed include stock turnover. 44 .78 2008 % 9.15% in 2008.4 Returns on Working Capital show the relationship between working capital and profitability (PBIT). 2006. 4. Table4.2. it reduced again to 20. it reduce to 41.

The higher the times stock is been turned over the lower the number of days it takes to hold stock. in 2006 stock turnover was only 3 times. while in 2008 stock were turned over 7 times. 2007 indicates that stock were turned over 8 times which represent the lowest no. of days stock were held before sales in the years under review.6 Debtors collection period indicate how efficient is the company at controlling its debtors. 28 days in 2007. of Days stock is Held 4 times 89 days 6 times 65 days 3 times 138days 2007 8 times 46days 2008 7 times 50 days Source: Computed from Table 4. representing the highest no. while in 45 . Table 4. Table 4.13: Years Debtors Collection period 2004 2005 91 days 121days 2006 68 days 2007 28days 2008 40day s Debtors Collection period Source: Computed from Table 4. it can also be expressed as number of days stock is held. taking 65 days. while in 2007 the company had its highest sell during the years under review.Table 4. while in 2005 stock was turnover 6 time. The no. The above table shows that in 2006 the company did not sell much of its product. of time stock was turnover in 2004 was 4 times which took 89 days to hold the stock. of days stock were held.12: Stock Turnover and Days Held Years 2004 2005 2006 Stock Turnover (Times) No. It was 68 days in 2006.5 Stock turnover measures the number of times stock is replenished in an accounting period.13 shows that in 2004 was 91 days. in 2005 was 121 days.

4. of Responses 23 13 36 46 Percentage (%) 64 36 100 Source: Administered Questionnaire. The analysis indicates that Cadbury Nigeria PLC has not really managed its debtor very well in 2004.2008 was 40 days. According to this result it can be said that the company does not manage its creditor effectively and this may impede further credit facilities from the creditors. The research questions are presented below starting from the bio-data of the respondent.7 Creditor s payment period measures how many credit days is receive from suppliers. while in 2007 and 2008 were 38 days and 42 days payment period respectively.3 DATA ANALYSIS (PRIMARY DATA) The primary data analyzed under this chapter were draw mainly from the questionnaires distributed. 2006 and 2008. Table 4. 2005 had 55 days payment period.1 Bio-data of the Respondents Table 4. 2005. 89 days period in 2006. It was only in 2007 that the company had a good control over its debtors. . 2010. 4.3.14: Years Creditors Payment period 2004 2005 2006 91 days 55 days 89 days 2007 38 days 2008 42days Creditors payment period Source: Computed from Table 4.15: Gender Gender Male Female Total No. In 2004 there was a payment period of 91 days.

5 years 5 . Table 4. 2010. Table 4. while 36% of them are females. This signifies that at least more than half of the respondents are senior and executive staffs making their responses very pertinent. Table4.above Total No. .16.17: Years of Experience in the company Years of Experience 0 -1 year 1 . shows that majority of the respondent are senior staffs. of Respondent 7 18 11 36 Percentages (%) 19 50 31 100 Source: Administered Questionnaire. of Respondent 4 13 9 10 36 47 Percentages (%) 11 35 26 28 100 Source: Administered Questionnaire. representing 50%.Out of the total number of the respondent. These indicate that most of the respondents are males. executive staffs represent 19%. while 31% of them are junior staffs. Although 31% of the respondent are junior staffs.16: Current Level Held Respondent Level Executive Staff Senior Staff Junior Staff Total No. 2010. their views are also important to this study since they are all staff of the company.15 years 15 years . 64% of them are males.

11% work in the marketing department. of Respondent 24 4 8 36 Percentages (%) 67 11 22 100 Source: Administered Questionnaire. The above table indicates that majority of the respondents representing 67% are staffs working in finance and account department. This shows that all the respondent are staffs working in the company and at least 24 of them are in the finance and accounting department who are directly involve in the management of working capital. 2010. 48 . 26% have below fifteen years of experience and 28% of them have above fifteen years of experience. 35% have above one year but less than five years of experience. while 22% work in production department.Table 4.18: Department or Section Department Finance and Accounts Marketing Department Production Department Total No. thus marking their responses imperative. Table 4. This signifies that most of the respondents have well developed mind and experiences necessary to provide an opinion on this study.17 shows that 11% of the respondents have below one year experience.

3. of Respondent 11 5 12 6 2 0 36 Percentages (%) 31 14 33 17 5 0 100 Source: Administered Questionnaire. Sc. while holders of M.Sc.19. are 17% and 5% of them are P. Sc. M. P. holders. Others Total No.HD. 2010. 4.Sc. shows that majority of the respondents are B. The above tables in relation to the bio-data of the respondents signifies that all the respondents have well developed minds. OND holders followed by 31%. There was no respondent with other qualification not mentioned in the questionnaire.19: Educational Background Department OND HND B. Question 6: The importance of effective and efficient working capital 49 .2 Level of Working Capital Management The followingquestions were asked in respect to this research question.Tabra4. experience and are matured enough to answer questions relating to the issue of working capital management. representing 33%.HD holders. Table 4.

and 33% agree that the company has fully appreciated the importance of effective working capital management.management has been fully appreciated by your company. Question 7: Cadbury Nigeria PLC as a manufacturing company maintains an optimum level of working capital in her daily operations. 45% of the respondents strongly agree. Table 4. 50 .20: Response to question 6 Responses Strongly agree Agree Disagree Strongly disagree Total No. PLC takes into consideration the import of effective working capital management. The above table shows that. 2010. However only 14% of the respondents disagree and 8% strongly disagree that the company has not really appreciates the importance of effective working capital management. of Respondent 16 12 5 3 36 Percentages (%) 45 33 14 8 100 Source: Administered Questionnaire. The above table shows that management of Cadbury Nig.

respondents representing 19% strongly agree and 33% of them agreed that Cadbury Nigeria PLC maintains an optimum level of working capital in her daily operations. In conclusion we can say that Cadbury Nig. PLC does not have an efficient level of working capital. In table 4. PLC does not maintain an optimum level of working capital.21.21: Response to Question 7 Responses Strongly agree Agree Disagree Strongly disagree Total No. of Respondent 7 12 10 7 36 Percentages (%) 19 33 29 19 100 Source: Administered Questionnaire. While 48% of them representing 29% who disagree and 19% who strongly disagree that Cadbury Nig. However they try as much as possible to attain at least an average level of working capital in their daily operation. Question 8: An optimum level of working capital impacts on the profitability of the company 51 . 2010.Table 4.

Question 9: Working Capital Management in an effective tool in evaluating the performance of your company Table 4. Table 4. of Respondent 5 16 10 5 36 Percentages (%) 14 44 28 14 100 Source: Administered Questionnaire. indicates that 72% of the respondents consisting of 25% who strongly agree and 47% who agreed that a good working capital management impacts positively on profitability. It could be concluded that working capital.Table 4. 2010. 2010. While only 28% of the respondents disagreed that working capital management do not any impact on profitability. 52 .22: Response to Question 8 Responses Strongly agree Agree Disagree Strongly disagree Total No.22. of Respondent 9 17 8 2 36 Percentages (%) 25 47 22 6 100 Source: Administered Questionnaire. when managed properly helps in cost reduction and increase in profitability of the company along with other factors.23: Response to Question 9 Responses Strongly agree Agree Disagree Strongly disagree Total No.

24. 2010. Cadbury Nigeria PLC prefer short term financing to long term financing of current assets 53 . However 41% of them disagreed that working capital is not a good tool for measuring a company s performance. Based on this responses. while 17% of them strongly disagreed.The above table shows that 59% of the respondents are of the opinion that working capital serve as an effective tool for measuring performance of a company. 31% of them agreed. Question 10: Cadbury Nigeria PLC prefer short term financing to long term financing of current assets Table 4. other factors should be also considered when measuring a company s performance. The reason why there were many respondents that disagreed might be due to the fact that working capital management contributes just a little to progress of a company. indicates that 25% of the respondents strongly agree that Cadbury Nigeria PLC prefer short term financing to long term financing of current assets. while 29% of them are of the opinion that Cadbury Nigeria PLC prefer long term financing instead short term financing of current assets.24: Responses Strongly agree Agree Disagree Strongly disagree Total Response to Question 10 No. of Respondent 9 11 10 6 36 Percentages (%) 25 30 28 17 100 Source: Administered Questionnaire. Table 4.

2010. while 25% of them agreed. 29% of the respondents disagreed and 10% of them strongly disagreed that Cadbury Nigeria PLC does not encounters difficulties in management of its working capital components. Table 4. Question 11: Cadbury Nigeria PLC encounters difficulties in the efficient and effective management of its working capital components.3. of Respondent 13 9 10 4 36 Percentages (%) 36 25 29 10 100 Source: Administered Questionnaire.25: Responses Strongly agree Agree Disagree Strongly disagree Total Response to Question 11 No. Table 4.25. Question 12: How will you assess the effectiveness of the company s working capital management towards the need for cost reduction and increase in profit 54 .3 Effect of Inefficient Working Capital Management The followingquestions were asked in respect to this research question. 4. indicates that 36% of the respondents strongly agree that Cadbury Nigeria PLC encounters difficulties in the efficient and effective management of its working capital components.since more than 50% of the respondents agreed.

Table 4. 55 . From the data above. shows that 59% of the respondents were of the opinion that effective working capital management has been fair in contributing to the efficiency of the company.26.26: Response to Question 12 Responses Very Good Good Fair Poor Total No. it is crystal clear that 72% of the respondents agree that the Organization has never experienced lack of funds to meet its immediate obligation. 35%said good while 6% said very good.Table 4. of Respondent 26 10 36 Percentages (%) 72 28 100 Source: Administered Questionnaire. Question 13: Has your company ever experience lack of funds to meet its immediate obligation. Table 4. the company fairly manages its working capital. while 28% of the respondents were indifferent. Based on this.27: Responses Yes No Total Response to Question 13 No. 2010. 2010. This contributed to the more reason why there has been little increase in the profit of the company as shown in financial statement. of Respondent 2 13 21 0 36 Percentages (%) 6 35 59 0 100 Source: Administered Questionnaire.

thus. iv. inflation Quality and integrity of staffs. v. ii. Imposition of taxes. Government policies like sudden ban on importation of resources. Interference in management decision by the board. iv. PLC mentioned by the respondents. 56 . i. iii. waste and theft. Operating inefficiency occurs due to difficulties in meeting day to day commitment. lowering the rate of returns on investment. Inefficient utilization of assets due to lack of working funds. ii. most common among them are provided below: i. Official corruption and bribery. Excess of working of capital may result in the unnecessary chances of accumulation inventories increasing inventory mishandling.Question 14: What factor do you think militate against effective management of working capital components in your company? Many responses were obtained from this question. Question 15: What are the immediate impacts of inefficient management of working capital in your company? The following were some of the immediate effect of inefficient management of working capital in Cadbury Nig. Attractive credit opportunities may be loss due to paucity of working capital. iii. However.

1 Hypothesis One Hypothesisone will be tested using the correlation coefficient statistical technique in other to measure the linear relationship between working capital and profitability. Table 4.937 9. The hypothesis is restated as follows: Ho: Working Capital Management of Cadbury Nigeria PLC does not enhance its profitability. The hypotheses are formulated under the NULL (Ho) and ALTERNATIVE (H1) hypothesis so that the researcher will be objective and consistent in his decision on whether to accept or reject the hypothesis as the case may be. 4.853) Nm (2.841) (8.891 4. Hypothesis one will be tested using Correlation coefficient.508 Nm (1. two set of hypotheses were formulated. Excessive working capital may make management complacent. while hypothesis two will be tested using Chi-square statistical technique.461) (13.v. leading to managerial inefficiencies.101) 2008 Nm (1.4. 4. H1: Working Capital Management of Cadbury Nigeria PLC enhances its profitability.320) (14.28: Contingency Table for Hypothesis One Year 2004 2005 2006 2007 Nm PBIT (X) Working capital (y) 3.391 Nm 3.4 HYPOTHESES TESTING As earlier stated.428) 57 .

while Working capital represent the independent variable.7005. The hypothesis is restated as follows: Ho: Cadbury Nigeria PLC does not have an optimum level of Working Capital Management. Profit Before Tax and Interest (PBIT) represent the dependent variable. Using the correlation coefficient (r) in measuring the relationship between these variables. 4.4 In the table above.2 Hypothesis Two To test the hypothesis which states that Cadbury Nigeria PLC has an optimum level of Working Capital Management? We applied chi-square distribution statistics. Decision: Since the calculated correlation coefficient (r) is greater than 0 but less than 1.4.Source: Computed from Table 4. then the null hypothesis is rejected while the alternative hypothesis is accepted which state that working capital management of Cadbury Nigeria PLC enhances its profitability. the result obtain is r= 0. 58 . H1: Cadbury Nigeria PLC has an optimum level of Working Capital Management.

Degree of Freedom (4-1) (4-1) = 9 degree of freedom The value of chi-square table X2tunder 9 degree of freedom at 5% level of significance is 16. Therefore. the null hypothesis is accepted and the alternative hypothesis is rejected. Cadbury Nigeria PLC does not have a good Working Capital Management. 2010.919 Decision: Since the value of (X2c)is less than the value of (X2t).29: Contingency Table for Hypothesis Two Responses Question(6) Question(7) Question(8) Strongly Agree Agree Disagree Strongly Disagree Total 3 36 7 36 2 36 12 5 12 10 17 8 16 7 9 Question(9) 5 Total 37 16 10 57 33 5 36 17 144 Source: Administered Questionnaire.Table 4. 59 .3895 Value of chi-square table (X2t) = 16.919 Therefore: Value of chi-square calculated (X2c) = 14.

The correlation coefficient calculated shows a positive relationship between working capital and profitability of the company. In fact. 60 . The debtor s collection period shows an inefficient management of the company s debtors. It was also found out from the hypothesis tested using chi-square that Cadbury Nigeria PLC doesn t have a good management of working capital. however the relationship was not very strong. The component working capital analysis shows that stocks had the highest percentage of current asset.5 SUMMARY OF FINDINGS From the presentation and analysis of data.4. it was found out that the current ratio and the acid test ratio of the company was not favorable and did not show good management. while there was inconsistency in the management of creditors. This was because the ratios over the years under reviews were below the industry average of 2 times the current liabilities. The efficiency ratios showed that lot of the company s capital is tied down as a result of low stock turnover in most of the years in review. this indicate that the company may not be too liquid in the short run. it is necessary to give a clear and concise summary of findings base on the results obtain. In determination the liquidity positions of Cadbury Nigeria PLC. Bank overdraft and short term borrowing on the other hand took the highest percentage of current liabilities in most of the years in review. the current liabilities in some years exceed the current assets.

Chapter One covered the general introductory aspect of the study. The techniques to be employed in analyzing the data collected were also established in the chapter. in which Cadbury Nigeria PLC was the case study. scope and significance of the study. Chapter Three of this study covers the methodology adopted in the collection of data which include both the primary and the secondary data. Chapter Four of the study is devoted to the presentation and analysis of data collected with a view to confirm or refute the research questions. The chapter also points out the objectives. Finally. Various working capital ratios were also computed. The hypothesis is tested to arrive at valid conclusion. 5.2 CONCLUSION 61 . CONCLUSION AND RECOMMENDATIONS 5.1 SUMMARY This research work studied the effect of working capital management on the profitability of manufacturing firms. conclusion and recommendations. Chapter Five is devoted to summary. Chapter Two dived into the work and postulations of scholars who have written tremendously on issues relating to working capital and profitability. Research question and hypothesis were also formulated and stated in the chapter.CHAPTER FIVE SUMMARY. The study is broken into five chapters as follows.

3 RECOMMENDATIONS Based on the investigations conducted and the findings of this study. This should be done annually. the following recommendations are put forward by the researcher. 62 . It is essential because there is need for a business to be able to meet its short term obligation and other immediate need of the business. quarterly. This will discourage and help to detect waste and pilferations of stock within the company. Working capital can also be used to access the performance or otherwise of a business in the short run.Effective and efficient management of working capital is essential to the operation of any business entity be it manufacturing or retail business. The existence of working capital in Cadbury Nigeria PLC from the ratios computed and questionnaires analyzed we can draw the conclusion that the company has inadequate and poor quality working capital. for the management of Cadbury Nigeria PLC to improve on areas of weaknesses. monthly and weekly basis as the case may be. Firstly the company adopts physical stock counting. Finally it can be concluded that working capital if managed properly can contribute to cost reduction and increased profitability of a company. 5. The stock record card figure should agree with actual quantity. This assertion is based on the fact that the ratios computed showed the weakness of the company's position and which shows that the company has been overtrading and over stocking of goods.

Finally. This is because a company that has no favorable liquidity position may likely face insolvency problems. the poor working capital can also be remedied through provision of additional fund by the shareholders and loans from banks. Cadbury as international company should carry out more research to develop new product with the view of diversifying into new areas or lines of business.The company should reduce the period between the time cash is paid out for raw material and the time cash is recorded from sales of the company s product. This will help the company to be more aware of the importance of effective working capital management and to back on their industrial experience with modern and scientific ideas as they may be necessary. The company should pay more attention to its liquidity position and improve on it. the company should from time to time organize orientation courses and seminars on working capital management for its staff. In addition. This will provide funds for regeneration and increasing working capital of the firm thereafter. 63 .

A Journal of Association of Student Accountants. (2007).Shomolu. Ltd.Annual Reports and Accounts. Lagos: Ceemol Nig.. Financial Management. Strategic Financial Management. p. R. (1986). Elikwu. 6. Vol.REFERENCES Aborede. Lagos: Master stroke Consulting Ltd.. California: Santa Monica Publishers. M. Chetwynd. Agbor. 64 .. Working Capital Management. (2008).Lagos:Bendona and Associates Ltd. Working Capital: A tool for cost Reduction and Improvement in Profitability (A study of Nigeria Breweries PLC.). (2002). G. Akinsulire. (2000). (2006).. Inventory Management: The Student Accounts. M.. A. A..Port-Harcourt.Research Project Made Easy: A Simplified Approach to Write & defend A Good Research Report. Braid. O. Lagos: Cin-Eight Publishers. Cadbury Nigeria PLC. 4th ed. Ifeh. J. (2004-2008). 9. (2006).Fundamentals of Business Statistics. M. University of Science and Technology.O..

Understanding Credit and Risk Management. 2 Pandey. (1997).. E.. K.Introduction to Research Methodology in African. I. Nwanna. Online. Concepts in Financial Management Finance & Banking. Financial Management: 3rd ed. (2005). Trends in Working Capital Management. (2006).. (2006). 23(2). Brierly Jones Ltd.. Padachi. 288 Osuala. C. Nigeria. A.25 Osisioma. Lagos: Gold trust ventures Ltd.. 65 . Vikies Publication. Vol. (2006). (1990): Working Capital Management: Studies in Accountancy. Financial Management: Concepts. O. Olowe. A Typically x-ray of working capital Management: The Nigerian Accountant. S.. Osibodu. Enugu: New Age Publishers.O. C.Lagos:Standard 3ICE publishers. (2005). M. (1990). p. I. Onitsha: First Publishers Ltd. Lagos: Vol. Madufor. Analysis and Capital Investment. International Review of Business. p. Assessed 8th September 2010. India.Enugu..

www.Raheman.org (2006).279 .org (1999 2000). M.wikipediaencyclopedia. Managing Working Capital 66 . A.pp.300.Planware. Working Capital www..Vol. Working Capital Management And Profitability (Case Of Pakistani Firms). (2007). International Review of Business Research Papers. & Nasr. 3(1).

I will be grateful if you can assist me in completing the questionnaire as sincere as possible. conducting a research on the topic the effect of working capital management on profitability and your company was chosen as a case study. Gwagwalada. Yours sincere.M. 117. Degree in Accounting. This is in partial fulfillment for the required for the award of B.APPENDICES APPENDIX 1 SAMPLE OF QUESTIONNAIRE Department of Accounting. Faculty of management sciences. OlusegunSegun. I am a final year student of University of Abuja. P. Faculty of management Sciences. Please be assured that information provided will be treated in strict confidence and will be used for research purpose only.B. Dear Sir/Madam.Sc. 67 . Department of Accounting. Abuja.

P. Department or Section: Finance and Accounts Marketing Department Production Department ( ( ( ) ) ) 5.THE QUESTIONS SECTION A: 1. Sc. 2. ( ) ) Others.HD. please specify 68 . Years of Experience in the company: Less than one year Over 1 year but less than 5 years 5 to 15 years Over 15 years ( ( ( ( ) ) ) ) 4. HND ( M. Gender: INFORMATION ABOUT THE RESPONDENTS Male ( ) Female ( ) Current Level Held: Executive Staff Senior Staff Junior Staff ( ( ( ) ) ) 3. Educational Background? ONH B. ( ( ( ) ) ) .Sc.

Strongly agree Disagree ( ( ) ) Agree ( ) ) Strongly disagree ( SECTION C: EFFECT OF INEFFICIENT WORKING CAPITAL MANAGEMENT 69 . Strongly agree Disagree ( ( ) ) Agree ( ) ) Strongly disagree ( 10. Strongly agree Disagree ( ( ) ) Agree ( ) ) Strongly disagree ( 8.SECTION B: 6. An optimum level of working capital impacts on the profitability of the company. Strongly agree Disagree ( ( ) ) Agree ( ) ) Strongly disagree ( 7. Cadbury Nigeria PLC as s manufacturing company maintains an optimum level of working capital in her daily operations. Cadbury Nigeria PLC prefer short term financing to long term financing of current assets. Strongly agree Disagree ( ( ) ) Agree ( ) ) Strongly disagree ( 9. LEVEL OF WORKING CAPITAL MANAGEMENT The importance of effective and efficient working capital management has been fully appreciated by your company. Working Capital Management in an effective tool in evaluating the performance of your company.

.................... .... iv................ Very Good ( Poor ( ) ) Good Fair ( ( ) ) 13........ How will you assess the effectiveness of the company s working capital management towards the need for cost reduction and increase in profit.................. ......................11... iv............... v. .......... Has your company ever experience lack of funds to meet its immediate obligation....................... ii............. iii................................................... Yes ( ) No ( ) 14............................... ................... ............................. 70 .................................... i................................. Strongly agree Disagree ( ( ) ) Agree ( ) ) Strongly disagree ( 12.... What are the immediate impact of inefficient management of working capital in your company? i........... iii.............. 15... .. What factor do you think militate against effective management of working capital components in your company.... Cadbury Nigeria PLC encounters difficulties in the efficient and effective management of its working capital components............. ii. ............................................................................. ...... ...........................

.184 567...391 9.609 171..064 78.853) (13....373 32....281 6.636.101) (14.254.937 (1.742.. APPENDIX 2 TABLE FOR CALCULATING CORRELATION COEFFECIENT Years 2004 2005 2006 2007 2008 Total X Nm 3.428) 50....544 90...835..052 Y2 Nm 19.044..281 XY Nm 17.. ..499.450 Y Nm 4.298...841) (2...891 3..139.867....561 19......996 16.828...461) (1..602 Where: x = Profit Before Interest and Tax: Y = Working Capital r= =0.201 20.708 37.969 3...389..402.v.320) 13.241...091.881 15..056..400 41.......960 122..7005 ™xy -™x(™y) [n™x2-(™x)2] [n™y2 ..598 X2 Nm 15..375.(™y)2] 71 ..521 1.432.508 (8..073.

7794 1.0625 0.0625 1.25 4.25 4.25) 0.25 14.5625 7.25 14.75 (1.0625 5.75 45.2803 0.75 (3.25 8.0625 0.3553 0.25 9.25 8.25) 2.3895 72 .5625 5.0625 3.9527 0.E)2 (O E E)2 4.0625 5.75 (2.3712 0.0625 0.75 (0.25 14.3553 0.5307 0.5625 3.25 4.25 8.25 14.3674 1.25 9.2149 1.25) (2.25 Expected Frequency (E) 6.25) (0.0625 10.0068 1.25 9.0078 0.9257 0.5625 O-E (O .1323 Xc2= 14.5625 3.25) 1.1913 0.25 4.25) (2.3712 0.25 1.75 (2.0625 7.APPENDIX 3 Calculation of Chi-square for Hypothesis Two Observed Frequency (O) 16 7 9 5 12 12 17 16 5 10 8 10 3 7 2 5 9.0625 18.25) 2.25) 1.25 8.25) (4.5473 0.5625 5.

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