Final Essey Working Capital Management

COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT ACOUNTING AND FINANCE

ASSESSMENT OF WORKING CAPITAL MANAGEMENT
PRACTICE (IN THE CASE OF GUDER AGRO INDUSTRY IN
BAHIR DAR CITY) FOR PARTIAL FULLFILLMENT OF (BA)
DEGREE IN ACCOUNTING AND FINANCE.
SUBMITTED TO: INSTRUCTER BINIAM
Prepared By: NAME STUDENT ID NO.
SOLOMON TEKLU...............................................................................0506091
SOLOMON GEDAMU...........................................................................0506087
MESAY ZELEKE...................................................................................0505925
NADHII ALIYII………………………………………………..............0505982
RETA BELAY….………………………………………………………0506015
BAHIR DAR, ETHIOPIA
JUNE, 2015
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ACKNOWLEDGEMENT
First we would like to thanks to the almighty God/ALLAH for granting us great
guidance, energy, wisdom and academic intellect which enabled us to accomplish
this study.
Second our deepest appreciation and thanks go to our Advisor, Instructor Biniam,
for his constructive suggestions, right criticisms and guidance that helped us stay
on course and to finish this study.
Special thanks to our colleagues and a number of people who contributed greatly to
completion of this research and our deepest gratitude to the Guder Agro industry
management and department of finance and store who helped us to administer
questionnaires and interview, and to all the respondents who patiently bore the
displeasures of completing the questionnaires.
Finally we would like to thanks our parents and family those who supported us
morally and financially to finish this study.
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ABSTRACT
This study conducted with the purpose of assessing working capital management
practice in the case of Guder Agro industry. The main objective of the study was
made to assess working capital management practice in Guder Agro industry. The
population of this study was includes all employees of financial department. The
study was use primary (interview and questionnaire) and secondary data (financial
statements). It also looked at some related literatures. After existing literatures has
been reviewed the study is conducted based on the design .The study is designed in
the methodology part to figure how it is conducted and were reach at same
conclusions and then the result was presented by using percentage, table, measure
of tendency, and ratio. Finally we give some recommendation based on the finding.
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Table Contents
ACKNOWLEDGEMENT...............................................................................................................................2
ABSTRACT......................................................................................................................................................3
CHAPTER ONE..............................................................................................................................................1
1.1 INTRODUCTION..................................................................................................................................1
1.2 BACKGROUND OF THE STUDY........................................................................................................1
1.2 BACK GROUND OF THE COMPANY............................................................................................................2
1.3 STATEMENT OF THE PROBLEM.................................................................................................................3
1.4 RESEARCH QUESTIONS..............................................................................................................................3
1.5. OBJECTIVE OF THE STUDY.......................................................................................................................3
1.5.1 General objective.............................................................................................................................3
1.5.2. Specific objectives...........................................................................................................................3
1.6. SIGNIFICANCE OF THE STUDY..................................................................................................................4
1.7. SCOPE OF THE STUDY...............................................................................................................................4
1.8 LIMITATION OF THE STUDY.......................................................................................................................4
1.9. ORGANIZATION OF THE STUDY...............................................................................................................4
CHAPTER TWO.............................................................................................................................................5
2. RELATED LITERATURE REVIEW........................................................................................................5
2.1. CONCEPTS AND NATURE OF WORKING CPITAL MANAGEMENT......................................5
2.1.1 LIQUIDITY.....................................................................................................................................6
2.1.2 CURRENT ASSET MANAGEMENT............................................................................................7
2.1.3 CASH MANAGEMENT.................................................................................................................7
2.1.3.1 Conversion Cycle Theory........................................................................................................7
2.1.4 ACCOUNT PAYABLES..................................................................................................................8
2.1.6 INVENTORY MANAGEMENT.....................................................................................................9
2.2 NEED FOR WORKING CAPITL MANAGEMENT........................................................................10
2.2.2 Determinants of working capital...................................................................................................10
2.2.3 Source of finance...........................................................................................................................11
2.3 EMPIRICAL LITERATURE........................................................................................................................12
CHAPTER THREE.......................................................................................................................................13
3. RESEARCH METHODOLOGY AND DESIGN....................................................................................13
3.1 RESEARCH DESIGN..................................................................................................................................13
3.4. SAMPLE DESIGN AND TECHNIQUES........................................................................................................13
3.4.1 The study population.....................................................................................................................13
3.4.2. Sample size...................................................................................................................................13
3.5 SOURCE OF DATA.....................................................................................................................................13
3.7 METHOD OF DATA PRESENTATION.........................................................................................................13
3.8 DATA ANALYSIS TECHNIQUES.................................................................................................................14
CHAPTER FOUR..........................................................................................................................................15
4. DATA PRESENTATION, ANALYSIS AND INTERPRITATION.......................................................15
4.1 INTRODUCTION........................................................................................................................................15
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4.2. RESPONSE RATE OF PERSONAL INFORMATION...................................................................................15
4.3 FINANCIAL PERFORMANCE OF GUDER AGRO-INDUSTRY.....................................................................16
4.4 WORKING CAPITAL MANAGEMENT PRACTICES...................................................................................17
4.4.1 Receivables Management Practices..............................................................................................18
4.4.2 Payables Management Practices...................................................................................................21
4.4.3 Inventory management practice....................................................................................................23
4.4.4 Cash management practices..........................................................................................................26
CHAPTER FIVE................................................................................................................................................................29
5. SUMMARY OF FINDING, CONCLUSION AND RECOMMANDATION...........................................................29
5.1 INTRODUCTION.........................................................................................................................................................29
5.2 SUMMARY OF FINDING.....................................................................................................................................29
5.3 CONCLUSION.............................................................................................................................................................30
5.4 RECOMMENDATIONS OF THE STUDY.......................................................................................................................31
REFERENCE.....................................................................................................................................................................32
APPENDIX.1 QUESTIONIARRIE..................................................................................................................................34
APPENDIX 2 INTERVIEW.............................................................................................................................................39
APPENDIX 3 WORKING CAPITAL RATIOS.............................................................................................................40
APPENDIX 4: FINANCIAL REPORT AND BALANCE SHEET OF GUDER AGRO INDUSTRY FROM 2012-
2014......................................................................................................................................................................................41
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List of tables
TABLE 1 GENDER OF THE RESPONDENTS OF GUDER AGRO INDUSTRY ..........................................17
TABLE 2 QUESTION NO.2 EDUCATIONAL STATUS OR LEVEL OF EMPLOYEES IN GUDER AGRO
INDUSTRY....................................................................................................................................18
TABLE 3 QUESTION NO.3 RESPONDENTS POSITION IN THE COMPANY...........................................18
TABLE 4 QUESTION NO.4 WORK EXPERIENCE OF EMPLOYEES IN GUDER AGRO INDUSTRY........18
TABLE 5 NET PROFIT TREND BETWEEN2012-2014 OF GUDER AGRO INDUSTRY...........................19
TABLE 6 CURRENT RATIO OF GUDER AGRO INDUSTRY...................................................................19
TABLE 7 TABLE SHOWING WORKING CAPITAL TURNOVER RATIO OF GUDER AGRO INDUSTRY..20
TABLE 8 QUESTION NO.5 SOURCES OF RECEIVABLES OF GUDER AGRO INDUSTRY.....................20
TABLE 9 QUESTION NO.6 TRADE RECEIVABLES PERIOD OF GUDER AGRO INDUSTRY..................21
TABLE 10 QUESTION NO.7 ACCELERATION TECHNIQUES TO REALIZE RECEIVABLES OF GUDER
AGRO INDUSTRY.........................................................................................................................22
TABLE 11 MEAN, MEDIAN AND MODE OF THE ABOVE TABLE...........................................................23
TABLE 12 QUESTION NO.8 LEVEL OF COMPANY INDEBTEDNESS.....................................................23
TABLE 13 QUESTION NO.11 CREDIT PAYMENT PERIOD....................................................................24
TABLE 14 QUESTION NO.12 PAYMENT TECHNIQUES GUDER AGRO INDUSTRY..............................24
TABLE 16 QUESTION NO.14 CONSIDERATION LEADING TO INVENTORY ORDERING?.....................26
TABLE 17 QUESTION NO.15 INVENTORY SITUATION AFFECT THE COMPANY.................................26
TABLE 18 MEAN, MEDIAN AND MODE QUESTION NO.15 ABOVE TABLE...........................................27
TABLE 19 QUESTION NO.16 MANAGE SLOWING MOVING/OBSOLETE INVENTORY.........................27
TABLE 20 INVENTORY TURNOVER RATIO.........................................................................................27
TABLE 21 CASH CONVERSION CYCLE OF GUDER AGRO INDUSTRY.................................................28
TABLE 22 CASH TURNOVER RATIO....................................................................................................29
TABLE 23 QUESTION NO.17 OPTIMAL CASH MANAGEMENT..........................................................29
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CHAPTER ONE
1.1 INTRODUCTION
1.2 BACKGROUND OF THE STUDY
Working capital management is the management of shortterm financing requirements of a firm. This
includes maintaining optimum balance of working capital components; receivables, inventory and
payables and using the cash efficiently for day to day operations. Optimization of working capital
balance means minimizing the working capital requirements and realizing maximum possible
revenues. Efficient Working capital management increases firms’ free cash flow, which in turn
increases the firms’ growth opportunities and return to shareholders. Working capital management is
defined as the ability of an organization to fund short term assets and short term liabilities (Harris,
2005). Management of working capital needs careful attention since it plays an important role in
determination of firms’ financial performance, liquidity and risk as well as firms value (Smith ,
1980).Greater investment in current assets leads to lower risk in settling short term obligations while
leading to lower profitability. Specifically working capital investment involves a tradeoff between
profitability and risk. Decisions that tend to increase profitability tend to increase risk and conversely
decisions that focus on risk reduction will tend to reduce potential profitability. Every business
requires working capital for its survival. Working capital is a vital part of business investment which
is essential for continuous business operations. It is required by a firm to maintain its liquidity,
solvency and profitability (Mukhopadhyay, 2004). The importance of managing working capital of a
business efficiently cannot be denied (Filbeck and Krueger, 2005).
Working capital management explicitly impacts both the profitability and level of desired liquidity
of a business (Raheman and Nasr, 2007). If a firm will invest heavily in working capital that is more
than it needs, then the profits which can be generated by investing these resources in fixed or long
term assets will be diminished. Moreover the firm will have to endure the cost of storing inventory
for longer periods as well as the cost of handling excessive inventory (Arnold, 2008). On the other
hand, if a firm invests heavily on fixed assets to generate profits by neglecting its short-term capital
needs, then it is quite possible that it may have to face bankruptcy because of insufficient funds. The
profitability as well as adequate level of liquidity is required to be maintained for the survival of a
business. So if a firm will not pay sufficient attention to its working capital management, then it is
quite possible that the firm would have to face bankruptcy (Kargar and Blumenthal, 1994). Effective
management of working capital decreases the need for lending funds to pay back the short term debts
of the firm. There are different approaches for the management of working capital. Two basic
policies of working capital management are namely aggressive working capital management policy
and conservative working capital management policy. An aggressive investment policy with high
levels of fixed assets and low investment in current assets may generate more profits for a firm.
However it also accompanies a risk of insufficient funds for daily operations and for payment of
short term debts. A conservative investment policy is opposite to it with less investment in fixed
assets and more in current assets. For financing of working capital aggressive policy implies that
current liabilities are maintained at a greater portion as compared to long term debts. High level of
current liabilities requires more resources to be in liquid form to pay back debts earlier. But current
pay outs bear less rate of interest and hence can cause more savings. In conservative working capital
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financing policy a greater portion of long term debts is used in contrast to current liabilities. Working
capital management and profitability certainly have some relation with each other. Working capital
is very important part of business activities of any firm.
Net working capital is the difference between current asset and current liabilities, which is a part of
capital that need not to pay off in short term. That is working capital reflects the relative stability of
short term capital. We can be informed on the company financial risk, by the value of working
capital and some related indicators. Generally, the more working capital company own, the less
financial risk they may face. However, the much working capital is not suitable for the companies
who wish a long term development. In finance research, working capital management has not been
accorded sufficient attention. The researcher in the field of short term finance also argue that the
theories working capital management are not amenable to practical application (Cohan and Pringale,
1928).
Therefore, much had not been written on the subject until the sixties (Earnest, 1964). However, since
the early 1970’s panther of research has been conducted in relation to working capital management
(James, 1988). This indicates the importance of working capital management as a separate field of
research. Whatever may be the company, working capital plays an important role, as the company
needs capital for its day to day expenditure.
Good working capital management reveals higher returns of current assets that the current liabilities
to maintain a steady liquidity position of a company. Otherwise, working capital is a requirement of
funds to meet the day to day working expenses. So a proper way of management of working capital
is highly essential to ensure a dynamic stability of the financial position of an organization (Pandey,
2007).
1.2 Back ground of the company

GUDER Agro industry plc is a family owned company found in Bahir Bar, the capital of Amhara
regional state 563 km from Addis Ababa in the North West of Ethiopia. GUDER was established to
undertake investment in agriculture, industry and transport. It was legally established in 1998 with
fully subscribed and paid up capital of birr million. It merely started as a manufacturer of flour to
the society of Bahir Dar. Its major supplier of raw material is government subsidies and many
farmers in eastern Gojjam but due to increase in demand of the society and people from other region
it has currently expand its production and area of production. Currently in Bahir Dar, the company
has three flour mills, two for wheat and the other for corn flour and corn oil extraction. Adjacent to
these flourmills are found the Bahir Dar biscuit factory and warehouse all owned and operated by the
company. The management of the transport service, with its modern and high capacity trucks, is
located in Addis Ababa. In addition the company holds dairy development and cattle fattening in
Dangla, transportation service for total Ethiopia s.c after contract entered into, and trading activity.
By this it was able to satisfy the growing demand of the society as a whole and from many part of
Ethiopia such as from Mekele, Aksum and other part of the country. It sought to promote its business
connections and diversify its operations to improve its financial and human resources. As most of
the private business companies Guder private limited company used to be managed by the far-
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sighted and visionary owner Mr. Asrat. Mekonen. But due to the increase in the volume of business
transaction and the size of workable, the need to compete with huge business company it came to
believe that it is necessary to have well-organized and staffed organizational structure.
1.3 Statement of the problem

In every organization the working capital is important to maintain the smooth running of business
and play vital role on organization economic growth. Working capital management is the day to day
function of all management decisions that influence the size and effective of the working capital
(Kaur, 2010).working capital is motive power of business enterprise and it has components; current
asset (such as cash, receivables and inventory) and current liability and poor control over this current
asset and current liability will lead to incurring loss i.e. inventory are valuable only if they come be
sold and cash is useful, if it is not idle or there is no shortage of it. Similarly if the level of the
working capital is inadequate to meet requirement of the customer it leads to loss of sale, loss of
customers and loss of profit. Inefficient management of working capital not only reduces
profitability but ultimately may also lead a concern to financial crises. Both excessive and
inadequate working capital is harmful for a firm. Excessive working capital leads to unremunerated
use of scarce funds. On the other hand, inadequate working capital usually interrupts the normal
operations of a business and impairs profitability. In general, failure in working capital management
may result bankruptcy of the company. A large number of business failures have been attributed to
inability of financial managers to plan and control properly the working capital of their respective
firm (smith, 1980).
While there are only few studies that dealt with the short term financial management practices, they
have been exclusively under taken in the US, UK, AUSTRIA, BELGIUM, SWEDEN, INDIAN, and
other a few countries and also there are a few research conducted in Ethiopia for example at Jimma
university. The context is obviously different and the finding would most probably not applicable to
the local context where institutional set up and economic development are different. So, the
researchers will attempt to investigate the working capital management practice and the financial
performance of Guder Agro industry.
1.4 Research questions

 What are current working capital management practice employed by Guder Agro industry?
 How do this practice affect the working capital position and performance
of the company?
1.5. Objective of the study

1.5.1 General objective
The main objective of this study is to assess the working capital management practices of Guder
Agro industry.
1.5.2. Specific objectives

The specific objectives of this study are:
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 To assess the current working /capital management practices employed by Guder Agro
industry.
 To assess how do these practices affect the working capital position and performance of the
company.
1.6. Significance of the study

The results of this study will be significant in various aspects. First, on the basis of the findings of
the study, the report was draw some conclusions that will enable Guder Agro industry to identify the
management gap areas that affect working capital and to corrective reminds to keep the existing
profitability of the company. Second, this study will be significant in that if may help the
management of the company at the top level to make use of the out puts of this study in addressing
the working capital management problems.
1.7. Scope of the study

This study was conducted in Guder Agro industry, which is located in Amhara Region in Bahir Dar
city.
The study was attempt to deal only analysis of working capital management on the company
specified above which is Guder Agro industry due to time and financial is constrained. Therefore the
study was delimited to working capital management of Guder Agro industry.
1.8 limitation of the study

 The ratios have been calculated, analyses and interpreted for the period under study i.e. from
June, 30 2012 to June, 30 2014 only.
 Ratios are computed on the basis of historical financial statements. Hence, future
performance of the company not reflected.
 Low internet access in the college.
 Maybe some fractional error during calculations.
1.9. Organization of the study

The study was be organized in to five chapters.
Chapter one presents the introduction part, which includes back ground of the study, statement of the
problem, objectives of the study which includes general objective and specific objectives, research
questions, significance of the study, scope of the study, limitation of the study and organization of
the research report.
Chapter two resents with review of related literature.
Chapter three states research methodologies.
Chapter four also deals with data analysis and interpretation.
Chapter five which is containing summary, conclusions and recommendations.
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Chapter two
2. RELATED LITERATURE REVIEW
2.1. CONCEPTS AND NATURE OF WORKING CPITAL MANAGEMENT
Working capital management techniques utilized by business managers aids them in effectively
managing working capital. Techniques such as intersection of carrying costs and shortage cost,
working capital financing policy, cash budgeting, Economic order quantity and just in time are
applied to manage different components of working capital like cash, inventories, Receivables and
account payables. High performing companies understand the company and industry specific drivers
behind each component of operative working capital and focus on optimizing the most promising
ones. During this process, they consider the entire value chain to reveal the root causes of tied up
cash and take into account all interdependencies between the respective components. They apply a
holistic approach in which they do not randomly reduce costs but consider all trade-offs with costs
and capital employed to optimize the company value. By applying the appropriate levers of each
component, obstacles that slow cash flow can be removed and overall company process can be
improved. Working capital is considered as the life-blood of any business and its performance has
significant impact on the overall performance of the concerned firms. (Hampton, 1989) stated that
working capital policy is a function of two decisions: the appropriate level of investment in currents
assets and the chosen methods of financing the investment. He explained further that the level of
company's current assets and working capital, in respect of the company's total corporate structure
and flow of funds is a tradeoff between profitability and risk. Thus, if there were little risk, an
aggressive working capital would be used whereby the company should maintain a minimum level
of cash, securities, debtors and stocks. However, if there is little stability, a more conservative policy
will be called for, requiring high cash balances and high stock reserves.
In many organizations today, liquidity position is thus a major issue that must be put into
consideration by financial managers. This liquidity state can be identified by their risk-return
Characteristics (Weintraub and Visscher, 1998). Therefore, risk and return tradeoffs are inherent in
alternative working capital policies. High risk, high return working capital investment and financing
strategies are referred to as aggressive; lower risk and return strategies are called moderate or
matching; still lower risk and return is called conservative (Moyer, 2005; Pinches 1991; Brigham
and Gapenski, 1987). A firm may choose an aggressive working capital management policy with a
low level of current assets as percentage of total assets, or it may also be used for the financing
decisions of the firm in the form of high level of current liabilities as percentage of total liabilities
(Afza and Nazir, 2007). Keeping an optimal balance among each of the working capital components
is the main objective of working capital management. Business success heavily depends on the
ability of the financial managers to effectively manage receivables, inventory, and payables (Filbeck
and Krueger, 2005).
The current assets, commonly called working capital represent the portion of investment that
circulates from one to another in ordinary conduct business.
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This idea embraces the recurring transaction from cast to inventories, than to receivables and back to
cash that forms the operating cycle of the firm.
There are two types of working capital:
1. Permanent working capital and
2. Temporary (fluctuating variable) working capital
Permanent working capital is a minimum amount (states stocks of cash and inventories required to
be kept in the form of current assets. It is a fund required for the day to day operational activities of
the company.
Temporary working capital ( fluctuating/ seasonal) is the amount required to meet seasonable
demands current liabilities represent the firms short term financing because they include all debts of
the firm that come due ( must be paid) in one year or below one year.
Net working capital is defined as the difference between the firm’s current assets and current
liability.
If the firm has positive net working capital, it is the portion of the firms current assets are financed
with long term funds, meaningless short term funds financed with more long term funds. And it the
firm’s net working capital is negative shows the current liabilities exceed the current assets. So, the
firm is financing from less long term funds with more short term fund (aggressive strategy)
The concept of net working capital is useful to groups interested in determining the amount and
nature of assets that may be used to pay current liability. (V.K. Bhalla, 2003).
2.1.1 LIQUIDITY
Liquidity refers to the solvency of the firms over all financial position there as with which can pay
its bills. There are three basic measures of liquidity are:
New working capital =current asset-current liability
The current ratio =current asset/current liability
Quick (acid- test) ratio =current asset-inventory/current liability
Liquidity ratio has two parts, current ratio and quick ratio. Current ratio is the measure or expresses
the relationship between firm’s current asset and its current liability, and it is calculated as current
assets divided by the current liability.
The result shows the liquidity position of the firm.
High current ratio indicates the firms holding of excessive current asset. To how current ratio
indicates poor ability to satisfy short term obligation or liability. (Pandey, 2007)
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2.1.2 CURRENT ASSET MANAGEMENT
This is also another important concept in working capital management. The technique of current
asset management includes:
 Technique of cash management
 Technique of receivable management
 Technique of account payable management
 Technique of inventory management and sources of financing them.
Two major objective of current asset management.
1. Being to minimize cash operating cycle and
2. Being to finance those assets as effectively as possible with the overall objective of the return on
total capital employed.
2.1.3 CASH MANAGEMENT

Cash is ready currency to which all liquid assets can be reduce, cash balances are significantly
influenced by firm’s production and sales.
Techniques and by its procedure for collecting sales receipt and paying for purchases. These
influences can be better understand through analysis of firms operating and cash conversion cycle
(CCC).
2.1.3.1 Conversion Cycle Theory

The cash conversion cycle, which represents the interaction between the components of working
capital and the flow of cash within a company, can be used to determine the amount of cash needed
for any sales level. (Gitman, 1974) developed cash conversion cycle as part of operating cycle which
is calculated by adding inventory period to accounts receivables period and then subtracting accounts
payables from it. Its focus is on the length of time between the acquisition of raw materials and other
inputs and the inflows of cash from the sale of finished goods, and represents the number of days of
operation for which financing is needed.
The CCC is a dynamic measure of ongoing liquidity management, since it combines both balance
sheet and income statement data to create a measure with a time dimension (Jose and Lancaster,
1996). While the analysis of an individual firm‘s CCC is helpful, industry benchmarks are crucial for
a company to evaluate its CCC performance and assess opportunities for improvements because the
length of CCC may differ from industry to industry. Therefore the correct way is to compare a
specific firm to the industry in which it operates (Hutchinson, 2007). The cash conversion cycle is
used as a comprehensive measure of working capital as it shows the time lag between expenditure
for the purchase of raw materials and the collection of sales of finished goods (Padachi, 2006).
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Day-to-day management of a firm‘s short term assets and liabilities plays an important role in the
success of the firm. Firms with growing long term prospects and healthy bottom lines do not remain
solvent without good liquidity management (Jose and Lancaster, 1996).
By approximating these three periods with the financial ratios of inventory days, trade receivables
days and trade payables days, the length of the cash conversion cycle (CCC) is given by:
CCC = Inventory days + Trade receivables days − Trade payables days
According to (Arnold, 2008) the shorter the CCC, the fewer are the resources needed by the
company. So the longer the cycle the higher will be the investment in the working capital. But also a
longer cycle could increase sales, which could lead to higher profitability. But this longer cycle, will
also lead to higher investment and could rise faster than the benefits of the higher profitability. Many
authors like (Shin and Soenen, 1998) have argued that it is important for firms to shorten the CCC,
as managers can create value for their shareholders by reducing the cycle to a reasonable minimum.
They also argued that a longer cash conversion cycle might indicate that a company‘s sales are rising
and that the company can compete by having lax credit policies or high inventories. But on the
contrary, a higher CCC can actually hurt a company‘s profitability by increasing the time that cash is
tied to non-interest bearing accounts such as accounts receivables. By shortening the CCC the
company‘s cash flows will have a higher net present value because cash is received quicker. The
number of days accounts receivables; inventories and accounts payables are used as the
operationalization of the management of trade credit and inventory (Sharma and Kumar, 2011).
2.1.4 ACCOUNT PAYABLES

Account payables Firms generally make purchases from other firms on credits, recording the debts
as account payables. (Block, Hirk and Short,2000), It is the largest single category of short term debt
because small firms do not qualify from financing from other sources , they rely heavily especially
on trade credits as a result firms that do sell on credit have a credit policy that includes terms of
credits.
Account payables can further be looked into as trade account payables and other accounts payables.
Trade accounts payables are short term obligations to suppliers for purchases of merchandise and
other accounts payable includes liabilities for any goods and services other than merchandise.
Number of Days Accounts Receivable= (Accounts Receivable *365)/ Sales
2.1.5 Management of Account Receivables
Account receivables represent the extension of credit by which the firm gives to its customer’s. The
extensions of credit to customers by most manufactures are a cost of doing business. By keeping its
money tied up in account receivable, the firm loss time value of money and runs the risk of non-
payment by its customers.
Generally, the firm’s financial manager directly controls account receivable through involvement in
the establishment and management of
 Credit policy
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 Collection policy
Credit policy is the determination of credit selection, credits standards and credit terms. Credit
selection is the decision whether to extend to credit to customer and how much credit to extended.
The collection policy should consider the both firm’s had debt because of extended collection period
and the customers of the firm. It is bad for the firm. Therefore, the collection period had to consider
both the firms and its customer interest.
To High and to low collection period is not acceptable to be both internal kept.
2.1.6 INVENTORY MANAGEMENT

Inventory management is described as the planning, coordinating and controlling activities related to
the flow of inventory through and out of an organization, (Horngren, Datar and Foster, 2013);
Inventory may be classified as Supplies, Raw materials, Work in progress and finished goods.
(Brigham and Houston, 2002). These classes of inventory are essential part of virtually all business
operations, as with the case of account receivables, inventory levels depends heavily on sales,
whereas receivables build up after sales have been made, inventory must be acquired ahead of sales.
The necessity of forecasting sales before establishing target inventory levels makes inventory
management a difficult task. Also, since error in the establishment of inventory levels quickly leads
to low sales or excessive carrying cost, inventory management is as important as it is difficult. They
further said that, Proper inventory management requires close coordination among the sales,
purchasing, production and the finance departments as a result the finance manager must arrange any
financing needed to support the inventory buildup, because lack of coordination among the
departments may lead to poor sales forecast, hence leading to disaster. Moreover, (Brigham and
Houston, 2002) gave the following as the twin goals of inventory management: To ensure that
inventory needed to sustain operations are available and to hold the cost of ordering, and carrying
inventory to the lowest possible levels, they also stated that inventory is costly to store, therefore
there is always pressure to reduce it as part of the firms cost containment strategies. There are cost
associated with holding too little inventory because holding little inventory increases ordering cost
and the firm can miss out on profitable sales hence suffer a loss of goodwill that can lead to lower
future sales. So it is important to have enough inventories on hand to meet customer demands, this
then reduces the cost of goods sold and increases their net profit margin. Inventory policy has been
seen as a key component of working capital.
Number of Days Inventories = (Inventories * 365) ÷Cost of Sales
2.2 NEED FOR WORKING CAPITL MANAGEMENT

The need for working capital to run the day to day business activities cannot be over emphasized.
We will hardly find a business firm which does not require any amount of working capital. Indeed,
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firms differ in their requirements of the working capital. We know that a firm should aim at
maximizing the wealth of its shareholders.
2.2.1 Balanced working capital position

If firm should maintain a sound working capital position. It should have adequate working capital to
run its business operations. Both exclusive as well as inadequate working capital positions are
dangerous from the firm’s point of view excessive working capital means idle funds which learn no
profits for the firm. Paucity of working capital not only impairs the firm’s profits ability but also
results prevention interruption and inefficiencies.
2.2.2 Determinants of working capital

There is no sepals or formulate to determine the working capital requirements of firms. A large
number of factors, each having different importance, influence working capital needs of firms. Also,
the importance of factors should be made in order to determine total investment in working capital.
The following is the description of factors which generally influence the working capital
requirements of the firms.
Nature of the Industry
Demand of Industry
Cash requirements
Nature of the Business
Manufacturing time
Volume of Sales
Terms of Purchase and Sales
Inventory Turnover
Business Turnover
Business Cycle
Current Assets requirements
Production cycle
Inflation or price level changes
Credit cycle
Profit planning and control
Repayment ability
10
Cash reserves
Operation efficiency
Changes in technology
Firm’s finance and dividend policy
Attitude towards risk
2.2.3 Source of finance

A firm can adopt different financing policies on current assets.
Three types of financing may be distinguished.
 Long- term financing- the source of long term financing include orderly share capital.
Preference share capital, debtors, long term borrowings from financial institutions and
reserves and surplus retained earnings.
 Short-term financing- the short term financing is obtained for a period, less than one year. It
arranged is advance from banks and other suppliers of short term finance in the money
market. Short term finance include working capital funds from banks, public deposits,
commercial paper, factoring of receivable etc.
 Spontaneous financing- refers to the automatic sources of short term funds arising in the
normal cost exhaustions. Trade (suppliers’) credit and outstanding expenses are examples of
spontaneous financing. There is no explicit cost of spontaneous financing. A firm is expected
to until these source of finance to fullest extent. The real choice of financing current assets,
one the spontaneous source of financing have been fully utilized, is between the long term
and short term source of finances.
Depending on the mix of short-term and long-term financing the approach followed by a company
may be referred as:
 Matching approach
 Conservative approach
 Aggressive approach
2.3 Empirical Literature

The literature on working capital management practices identifies efficiency of cash management,
efficiency of receivables management and efficiency of inventory management as determinants of
financial performance model. Financial performance could therefore be improved if efficiency levels
of cash, receivables and inventory management practices are increased. The more aggressive
approach, where the working capital is minimized, is associated with lower risk and return. The
11
relaxed approach, with high cash reserves and high inventory, is associated with higher risk and
return (Weinraub and Visscher, 1998).
A further study by shin and soenen (1998) argued that the net trade cycle is a better working capital
efficiency measure comparing with the cash conversion cycle and the weighted cash conversion
cycle because it indicates the number of day sales. The company has to finance its working capital
and the working capital manager can easily estimate the financing needs of working capital
expressed as the fraction of the expected sales growth.
A review of prior literature reveals that there exists a significant relationship between financial
performance and working capital management by using different variable selection for analysis. In
addition it has been found out that different sector company have different levels of working capital
and they will always strife to maintain the level of working capital in the short term. The risk
behavior preference of the firm‘s management was also found to have an effect in the level of
current assets and current liabilities that is held by a firm
12
CHAPTER THREE
3. Research methodology and Design
3.1 Research design
The researcher team finds that descriptive method is suitable for this study. This design necessitates
a more economical collection of data at one point in time and is fundamental in objective analysis
due to timing similarity. Further justification for its adoption was based on Oso and Onen (2005) that
the design provides a quick, efficient and accurate means of accessing information about the
population and it is more appropriate where there is a gap of secondary data. The data that was
collected also provides descriptive information about the study subjects and was sourced from a mix
of primary and secondary sources. It is intended only to describe the working capital management
practice in case of Guder Agro industry.
3.4. Sample design and techniques

3.4.1 The study population
The target population of the study was constitute employees of Guder Agro industry, who are
currently 53 employees, but for this research the research team was taken only employees whose
concern in financial case which are working in department of finance about 4 employees in numbers.
3.4.2. Sample size

It is important to consider some practical reasons in determining sample size for example budget,
time and etc. therefore, to get valuable information the research team was selected all financial
department employees as sample size because the number of financial department employees are low
and manageable, so there is no sampling technique was used.
3.5 Source of data

The required information concerning working capital management was gathered using both primary
and secondary data sources.
3.6 method of data collection

Primary data was collected by developing questionnaires and to selected group of people based on
their department’s position and occupation. The secondary data was collected from published
financial statements and other published documents.
3.7 Method of data presentation

The analyzed data was presented by using different techniques such as: percentage, table and ratio
methods. This is mainly due to the source of data affect the use of data different techniques was used
to give more accurate and meaning full information.
13
3.8 Data analysis techniques
After necessary primary and secondary data was collected, the most important activities of data
analysis was started by editing and classifying the collected data into more meaning full and relevant
information as to depending on the analysis of tools the categories, so that the general analysis of
data was facilitated and relevant information was analyzed through descriptive method.
Subsequently, the refined data were analyzed using descriptive statistics such as percentages, table,
ratio, measures of central tendency and textual data portions were analyzed by content analysis to
describe working capital management practice of Guder Agro industry.
14
CHAPTER FOUR
4. DATA PRESENTATION, ANALYSIS AND INTERPRITATION
4.1 Introduction
In this chapter, data collected through questionnaire and from financial statement has been analyzed
using percentage, table and ratio and interpreted accordingly. The statistical analysis based on the
study’s thematic areas which include working capital management practice, and effect of working
capital management practice on performance of the organization.
4.2. Response Rate of personal information

The study sought to obtain data from all financial department employees. By the end of period all
questionnaire’s was completed and returned. This translated a response rate 100% was collected.
Table 1 Gender of the respondents of Guder Agro Industry
Gender of respondent’s Frequency Percentage Cumulative

percent
Male 3 75 75
Female 1 25 100
Total 4 100
Source: survey, 2015
Table 1 illustrates that 75% of the company financial department employees are male and 25% are
female in the company.
Table 2 Question no.2 Educational status or level of employees in Guder Agro Industry.
Educational level Frequency Percentages Cumulative percent
Diploma 1 25 25
Degree 3 75 100
Masters and above 0 0
Total 4 100
Table 2 illustrates that 25% of the finance department employees has diploma and 75% degree above
educational back ground.so 75% of employees are educated in higher educational institutions and
they have good and sufficient knowledge on their fields.
Table 3 Question no.3 Respondents Position in the company
15
Position in company Frequency Percentages Cumulative percent
Managing director(financial manager) 1 25 25
Finance officer/accountant 2 50 75
Procurement manager/officer 0 0 75
Other (specify) Cashier 1 25 100
Total 4 100
The above table shows that all respondents are works in department of financial 50% are finance
officer, 25% financial manager, and 25% cashier.
Table 4 Question no.4 Work experience of employees in Guder Agro Industry
Experience (Years) Frequency Percentages Cumulative percent
Less than 2 years 1 25 25
2 – 4 years 0 0 25
4 – 6 years 2 50 75
6 – 8 years 1 25 100
More than 8 years 0 0
Total 4 100
Table 4 shows that majority of the company financial department employees had accumulated
between less than 2 years of experience 25% and there were also employees between 4-6 years 50%,
and 6-8year’s experience each 25%, so 75% of employees are experienced above 4 years and
sufficient quality dissemination and informed topical opinions.
4.3 Financial Performance of Guder Agro-industry

The object of working capital management is to maximize the owners’ wealth which is measured in
terms of profitability. Effectively, therefore, a firm in losses does not answer to the business intent of
the owners. In this study, financial performance of the Guder Agro-industry was measured on the
basis of their net realized income. The study determined that between the calendar years 2012 and
2014, the company posted an aggregate increase in net profits despite observed and significant
periodic under-performances.
Table 5 Net profit trend between2012-2014 of Guder Agro Industry
16
Performanc 2012 2013 2014 Total Mean
e period
Net income (2,526,683.43 1,421,889.19 349,531.0 (755,262.64) (25,175.2133)

) 6
Source: financial report of Guder Agro-industry, 2012-2014
In the year ending June 30, 2012, the company had aggregately birr 2,526,683.43 in net loss. This,
however, increased to birr 1,421,889.19 in 2013 and the following year before a slight downward to
birr 349,531.06 in 2014. Over the three years period, the average financial performance is birr
25,175.2133 loss and standard deviation was 3.0896. This indicates that the company decrease its
worth by birr (25,175.2133) and it’s highly danger but it still getting profit.
4.4 Working Capital Management Practices

The working capital management practices were investigated under each of the working capital
management components: receivables, payables, inventory, and cash.
Table 6 current ratio of Guder Agro Industry
Particular 2012 2013 2014 Total Mean
Current asset 24,767,219.4 16,629,854.2 15,980,691.7 57,377,765.4 19,125,921.81

9 2 1 2
Current 17,507,986.3 18,803,843.0 16,302,387.0 52,614,216.4 17,538,072.16

liability 4 5 8 7
Current ratio 1.4146 0.8844 0.9803 3.2793 1.0931
Source: financial report of Guder Agro industry, 2012-2014
The standard current ratio is 2:1. The above table shows current ratio for three years from 2012-
2014 are calculated and presented in the above table. From the above table it is analyzed that the
mean (1.0931) and standard deviation (0.3996) and the current ratio position in the company is good
up to the year 2012 i.e., the company has properly managed its working capital requirements; it
shows good financial position of the company. After that there is slight decrease of the same in the
year 2013 to 0.8844 and slightly increase to 0.9803 in 2014.From the above table it is clear that the
company has relatively low current ratio which is the indication that the company assets are low
liquid and the ability to pay its current obligations not in time as when they are due.
Table 7 Table showing working capital Turnover ratio of Guder Agro Industry
Sales 30,775,865.0 45,610,792.01 54,311,288.2 130,697,945.22 43,565,981.74

0 1
17
Net working 7,259,233.15 (2,173,988.83) (321,695.37) 4,763,548.95 1,587,849.65
capital
Working 4.2395 (20.9802) (168.8283) (185.569) (61.8562)

capital
turnover ratio
Sources: financial report of Guder Agro Industry, 2012-2014
The above table 7 shows the working capital turnover ratio. From the above table it is analyzed that
the working capital turnover ratio of the company is 4.2395 in the year 2012, decrease in 2013 by
(20.9802) and in 2014 ratio decrease highly (168.8283). From the above table it can see that there is
a down trend in working capital turnover ratio between2012-2014. From the above table it can
inferred that there is an underutilization of working capital resource. Hence it is not a good
indication for the company.
4.4.1 Receivables Management Practices

Under this objective area, the study’s purpose was to determine the existence and effectiveness of the
company credit policy and its application in maximization of value of the firm. The indicators used
included payable sources, duration till actual receipts, and receipt acceleration approaches.
Table 8 Question no.5 Sources of Receivables of Guder Agro Industry
Source of receivables Frequency Percentages Cumulative percent
Loans and interests 0 0 0
Sales 2 50 50
Subscriptions and 0 0 50
charges
Return from 2 50 100

investment
Total 4 100
Table 8 illustrates that 50% of the company receivables were from sales and return from the
company investments (50%). These findings showed that at least 50% of the firm investment and
50% was in form of credit. This high demand for credit was justified that customers seek financial
help from the company.
The amounts owed to the customer were collected under different trade periods depending on the
nature of credit. Table 9 presents the findings’ details.
Table 9 Question no.6 Trade receivables period of Guder Agro Industry

18
Period (days) Frequency Percentages Cumulative percent
0-15 days 0 0 0
15-30 days 1 25 25
30-45 days 1 25 50
45-60 days 0 0 50
Over 60 days 2 50 100
Total 4 100
Table 9 illustrates that company debtors met their payments obligations within varying durations
ranging from zero to more than 60 days. At the high end, company management allowed 50% of the
receivables to be effected after a period of over 60 days from transaction date. This category was
predominated by sales which were receivable.25% receivables were actualized 15-30 days and 25%
from 15-30 days. The study, therefore, established that a higher proportion of receivables to the
Guder agro industry were long term.
On an ascending scale of 1 – 3 points, respondents were asked to rate the company approaches in
accelerating receipt of receivables. The various approaches adopted and extents of preference were
found as presented in Table 10.
Table 10 Question no.7 Acceleration techniques to realize receivables of Guder Agro Industry
Acceleration Highly Moderately Lowly Total

technique preferred(1) preferred(2) preferred(3)
Insistence on 3 1 0 4
lump sum cash
payment 75% 25% - 100%
Prompt 1 2 1 4
invoicing
25% 50% 25% 100%
Sending 0 1 3 4
overdue notices
- 25% 75% 100%
Asset 1 1 2 4
attachment
25% 25% 50% 100%
Additional 0 1 3 4
charge
- 25% 75% 100%
Debt collection 0 1 2 4
19
services
- 25% 75% 100%
Table 10 shows 25% agrees on moderate preferred and a higher degree of agreement 75% that
company to a higher extent preferred lump sum repayments especially at expiry of trade receivable
period. This was strategically meant to help in accelerating receipts from the indebted customers.
Prompt issuance of invoices was also adopted at a highly preferred 25%, 50% moderately preferred,
and 25% lowly preferred. This enabled some of the customer make transaction payments for
company promptly or any other time within the contract period. Another lowly preferred repayment
acceleration scheme was loading of additional charges 75% and 25% moderate preferred. The assets
were attached lowly preferred 50%, highly preferred 25% and 25% moderate preferred. Additional
charges 75% are prefers on lowly preferred. Debt collection services 25% agrees on moderate
preferred and 75% prefers lowly preferred, so that the firm lowly preferred delegating collection
duties to debt collection agencies from their customers.
1+2+3 6 n
μ= = =2 medain=( ) th Mode= highest frequency
3 3 2
Table 11 mean, median and mode of the above table
Acceleration technique Mean Median Mode
Insistence on lump sum 1.6667 1 1

cash payment
Prompt invoicing 2.6667 2 2
Sending overdue notices 3.6667 3 3
Asset attachment 3 2 3
Additional charge 3.6667 3 3
Debt collection services 2.6667 3 3
The above table shows that averagely (1.6667) respondents agreed collection of receivables in
insistence on lump sum is preferred. In case of prompt invoicing, sending overdue notices, asset
attachment, additional charge and debt collection services average (2.6667, 3.6667, 3, 3.6667, and
2.6667) of respondents agreed the above listed acceleration techniques are unpreferable.
20
4.4.2 Payables Management Practices
Other than their receivables, the Guder Agro Industry were found to also owe other individuals and
institutions significant amounts in whose contracts they were under repayment obligations. A trend
of company indebtedness for a period of three years was analyzed as presented in Table 12.
Table 12 Question no.8 level of company indebtedness
Debt period 2012 2013 2014 Total Mean
Outstanding 18,554,905.7 46,538,798.35 45,610,792.02 110,704,496.07 36,901,498.69

debt(birr) 0
Source: financial report of Guder Agro Industry, 2012-2014
Table 12 shows mean of birr 36,901,498.69 the company high level indebtedness among 2012-2014.
In the year ending 2012, the level of the company debt was birr 18,554,905.70 which increase to birr
46,538,798.35 in 2013 and then decrease to birr 45,610,792.02 in 2014. The year 2013 experienced
the highest degree of indebtedness birr 46,538,798.35.
The study further analyzed the company payable periods and established that like receivables
different durations were applicable. Table 13 gives the details
Table 13 Question no.11 credit payment period.
Payable period Frequency Percentages Cumulative percent
0 days 0 0 0
15 days 0 0 0
15-30 days 0 0 0
30-45 days 1 25% 25%
45-60 days 1 25% 50%
More than 60 days 2 50% 100%
Total 4 100%
Table 13 shows that 50% of the company delayed making payment more than 60 days. This was
followed by another class of 25% who cleared their outstanding debts between 45-60 days while
25% complied in payments between 30-45 days.
In quest of lengthening their trade payable periods, the company adopted various techniques as
illustrated in Table 14
Table 14 Question no.12 payment techniques Guder Agro Industry

21
Payment techniques Not significant (3) Moderately Highly Total
significant(2) significant(1)
Payment in 0 2 2 4
installment
0 50% 50% 100%
Negotiation for 0 1 3 4
extensions(postpone)
0 25% 75% 100%
Immediate settlement 1 2 1 4
when cash is available
25% 50% 25% 100%
Investing cash to pay 0 1 3 4

at maturity of grace
0 25% 75% 100%
period
Table 14 illustrate that payment in installment to delayed payment to creditors are 50% moderately
significant and 50% agreed on highly significant. In negotiation for extensions 75% respondent’s
agreed on highly significant and others respondents agreed 25% moderately significant. Another
immediate settlement when cash is available was also applied to derail any liability accumulation to
the company, 50% of respondent’s agreed on moderately significant, 25% highly significant, and
25% not significant. There was also investing cash to pay at maturity of grace period 75%
respondent’s agreed that its highly significant and the other 25% agreed that its moderately
significant.
1+2+3 6 n
μ= = =1.5 median( ¿ ) Mode=highest frequency
4 4 2
Payment techniques Mean Median Mode
Payment in installment 1.5 1 1&2
Negotiation for 1.25 1 1

extensions(postpone)
22
Immediate settlement when 2 2 2
cash is available
Investing cash to pay at 1.5 1 1

maturity of grace period
The above table show that payment in installment score 1.5mean that mean it is normal, negotiation
for postpone scores 1.25mean that mean averagely respondents agreed in its significant. Immediate
settlement when cash is available score 2mean this means averagely respondents agreed on its
insignificant. Investing cash to pay at maturity of grace period scores 1.5mean this means averagely
it’s normal.
4.4.3 Inventory management practice

Inventory management is described as the planning, coordinating and controlling activities related to
the flow of inventory through and out of an organization.
Acquisition and maintenance of inventory quantities were determined by various factors which were
established as presented in Table 16
Table 16 Question no.14 consideration leading to inventory ordering?
Considerations Frequency Percentages Cumulative percent
Actual demand 2 25% 25%
Demand projections 1 25% 50%
Stock replenishment 1 50% 100%
Unpredictable 0 0
No definite 0 0
considerations
Total 4 100%
The above table shows that the highest push for inventory variation was the need for actual demand
50% followed by the company demand projections 25% and replenishment 25%.
Still inventory, respondents were asked to rate on an ascending scale of 1-4 the extents of inventory
control measures. Responses were as presented in table 17
Table 17 Question no.15 Inventory situation affect the company
Inventory High (1) Moderate(2) Low (3) Non- Total

situation existent(4)
23
Stock-outs 0 1 2 1 4
0 25% 50% 25% 100%
Inventory 1 2 1 0 4
surplus
25% 50% 25% 0 100%
Emergency 0 0 3 1 4
ordering
0 0 75% 25% 100%
Supply 0 2 1 1 4
stoppage
0 50% 25% 25% 100%
The above table shows that 50% of respondents agreed on low, and 25% agreed on high and 25%
nonexistence on effect of stock out on inventory level of the Company. Next respondents agreed that
50% moderate, 25% high, and 25% effect of inventory surplus on company. And for the question
emergency ordering affect the company 75% respondents says low and 25% agreed on nonexistence.
At last 50% agreed on moderate, 25% low and 25% nonexistence for question supply stoppage affect
the company.
μ=
1+2+3+ 4 10 n th
= =2.5 Median =( ) mode is highest frequency
4 4 2
Table 18 mean, median and mode question no.15 above table
Inventory situation Mean Median Mode
Stock out 3 2 3
Inventory surplus 2.25 2 2
Emergency ordering 3.25 3 3
Supply stoppage 2.75 2 2
The above table shows that inventory surplus were experienced at high 2.25 mean scores and the
others Emergency ordering, stock out and supply stoppages were experienced at low levels of 3.25,
3, and 2.75 mean scores respectively.
Table 19 Question no.16 Manage slowing moving/obsolete inventory
Slowing/obsolete inventory Frequency Percentages Cumulative percent

management technique’s
Dispose them 0 0 0
24
Sell them at reduced prices 3 75% 75%
Keep them on the shelves/ 1 25% 100%

warehouse until they sold
Total 4 100%
The above table shows that 75% of respondents agreed that the company sell obsolete inventory at
reduced prices and the rest 25% agreed on the company keep inventory on the shelves until it’s sold.
Table 20 Inventory turnover ratio
Sales (birr) 30,775,865.00 54,311,288.21 48,989,799.92 134,076,953.1 44,692,317.71

3
Inventory 14,351,725.50 2,257,293.67 4,007,500.51 20,616,519.68 6,875,173.227

(birr)
Inventory 2.1444 24.0604 12.2245 38.43 12.8098

turnover ratio
From the above table it is analyzed that the inventory turnover in 2012 are 2.144, increased in year
2013, i.e., 24.0604 and then the ratio decreases in the year 2014, i.e., 12.2245.this shows that the
company turning inventory to sales are decreasing after 2013.
4.4.4 Cash management practices

The availability of cash balances was regarded a key determinant of the company competitive
ability because it would provide the means to invest in people, technology, and other assets.
Efficient cash management was essential to the Guder Agro Industry. This study investigated cash
management practices on the basis of cash conversion cycle, cash turnover ratio and company
alternatives to cash optimization.
Cash conversion cycle tells us how long it takes for the company to get cash back from its
investment in inventory, account receivable, and account payable in considering that purchases
made on credit.by not paying for purchase immediately the company reduces its liquidity needs.
Therefore the longer cash conversion cycle, the greater company need for liquidity.
Table 21 cash conversion cycle of Guder Agro Industry
Measure 2012 2013 2014 Total Mean
Inventory days 187.9307 17.0428 34.1320 239.1055 79.7018
25
Trade 96.8155 78.3841 63.1582 238.3578 79.4526
receivables days
Trade payables 229.2608 141.9710 139.0562 510.288 170.096

days
Cash conversion 55.4854 (45.5441) (41.7660) (31.8247) (10.9416)

cycle
The above table shows that cash conversion cycle of Guder Agro Industry are decreased in 2012 to
2014 from 55.4854 to (45.5441) then to (41.7660) so it shows that inventory days and trade
receivables days greater than trade payable days.
Table 22 Cash turnover ratio
Sales(birr) 30,775,865.00 54,311,288.21 48,989,799.92 134,076,953.13 44,692,317.71
Cash & bank 529,313.32 953,669.34 674,434.84 2,157,417.50 719,139.17

balance (birr)
Cash 58.1430 56.9498 72.6383 187.7311 62.147

turnover
Ratio
From the above table shows that the company cash turnover ratio is decreased in the year 2013 from
58.1430 to 56.9498, and then in the year 2014, it is increased to 72.6383. The Cash Turnover ratio of
the company from past 3 years, i.e., 2012-2013 , was very low compared to 2013-2014, as there is an
increase in the amount of sales of the company and the receivables is also increased and the net
working capital is decreased due to which the cash inflow of the company has reduced.
Table 23 Question no.17 Optimal Cash Management
N Company cash Strongly Agree (2) Neutral(3) Disagree(4 Strongly Total

o management agree(1) ) disagree(5
. )
1 There is well defined 0 1 2 1 0 4

policy on minimum
liquidity 0 25% 50% 25% 0 100%
2 There are regular cash 0 1 1 1 1 4

flow
projections(estimation) 0 25% 25% 25% 25% 100%
26
3 There are regular bank 1 2 1 0 0 4
reconciliations and
audits 25% 50% 25% 0 0 100%
4 There are ready 0 1 1 2 0 4

investment avenues
(opportunities) for 0 25% 25% 50% 0 100%
excess cash .
5 Excess cash is held to 0 2 0 1 1 4

meet future obligations
0 50% 0 25% 25% 100%
The above table shows that, in first question there is well defined policy on minimum liquidity,
respondents respond 50% neutral, 25% agree, and left 25% disagree. In the second, 25% agree, 25%
neutral, 25% disagree and 25%strongly disagree. In third question 50% are agree, 25% strongly
agree, and 25% neutral. In the fourth question, 50% disagree, 25% neutral, and 25% agree. In the last
for the question excess cash is held to meet future obligations 50% agree, 25% disagree, and 25% are
strongly disagree.
1+2+3+ 4+5 n
μ= =3 median=( ) th mode=highest frequency
5 2
Company cash Mean Median Mode

management
There is well defined 3 3 3

policy on minimum
liquidity
There are regular cash 3.5 3 2&3&4&5

flow
projections(estimation)
There are regular bank 2 2 2

reconciliations and
audits
There are ready 3.25 3 4

investment avenues
(opportunities) for
excess cash
Excess cash is held to 3.25 2 2
27
meet future obligations
The above table shows that 3mean score for the question, there is well defined policy on minimum
liquidity averagely it the result is normal because it equal to population mean. 3.5mean is score for
the question there are regular cash flow projections (estimation) this means averagely respondents
are not accepted. For the question there are regular bank reconciliations and audits it score 2mean
that means averagely respondents are accept it. The other question is there are ready investment
avenues (opportunities) for excess cash scores 3.25mean its means averagely respondents do not
accept it. In the last 3.25mean scores for the question of excess cash is held to meet future
obligations it means averagely it’s not accepted by respondents.
CHAPTER FIVE
5. SUMMARY OF FINDING, CONCLUSION AND RECOMMANDATION
5.1 Introduction
This chapter summarizes the study and makes conclusion based on the results. The implications from
the findings and areas for further research are also presented.
5.2 SUMMARY OF FINDING

The study has investigated working capital management practice and company financial
performance for Guder Agro Industry. Data have been analyzed by using descriptive analysis for in
years 2012-2014. Between the calendar years 2012 and 2013, the company posted an aggregate
increase in net profits despite significance annual underperformances. In the 2012, the company had
net loss birr 2,526,685.43. This however in 2013 increased to net profit birr 1,421,889.19 and in
2014 decreased to net profit 349,531.06. Over the three years period, averagely the company was in
net loss birr 25,175.2133.
The second part involved investigating the working capital management practices under receivables,
payables, inventory, and cash. Under receivables, payable sources, duration till actual receipts, and
receipt acceleration approaches were used as indicators. It was found that the Guder Agro Industry
had options of generating receivables from sales and return from investment. 50% of the company
receivables were a derivative of from sales and 50% return from investment. The amounts owed to
the company were paid under different trade periods depending on the nature of credit. Company
28
management allowed 50% of the receivables to be effected after a period of 60 days or more from
the transaction date. There was only 25% receivables actualized in 15-30 days and 25% receivables
actualized in 30-45 days. There was a higher degree of agreement that the Guder Agro Industry to a
higher extent preferred lump sum repayments (1.6667 mean) especially at expiry of trade receivable
period. This was strategically meant to help in accelerating receipts from the indebted customers.
Prompt issuance of invoices was also adopted at a lower level (2.6667 mean) on sale. This unable
some of the customers to make transaction payments promptly or any other time within the contract
period. Another lowly preferred repayment acceleration scheme was loading of additional charges
(3.6667 mean). Assets were attached (3 mean) in case of failure to remit the required amounts to the
company accounts. This was paired with issuance of overdue notices (3.6667 mean) in delayed
repayments. Moreover, there was another closer agreement that company lowly preferred delegating
collection duties to debt collection agencies (2.6667 mean) from their customers.
Other than their receivables, Guder Agro Industry also owed significant amounts. They were under
repayment obligations. In the year ending 2012, the level debt was at birr 18,554,905.70 which
increased to birr 46,535,798.35 in 2013 and decreased to birr 45,610,792.35 in 2014.
In quest of lengthening their trade payables period, the company adopted various techniques. There
was Guder Agro Industry company delayed making payments to their creditors by engaging in
installment arrangements (1.5mean). Nevertheless, settlement in cash (2mean) was also applied to
upset any liability accumulation to the company. At a highly extent, company invested available
funds prior to expiry of payables period in addition to seeking alterations to repayment conditions
(1.5 mean).There was also negotiation for repayment extensions (1.25 mean) which was above the
moderate extent.
Acquisition and maintenance of inventory quantities were determined by various factors. The highest
push for inventory variation was the need for actual demand (50%) followed by the company
demand projections (25%). The other factors considered were replenishment (25%).
Finally, the study investigated cash management practices on cash conversion cycle, cash turnover
ratio and company alternatives to cash optimization. The study found that averagely company cash
conversion cycle were (10.8416) mean and cash turnover ratio averagely (62.1470 mean). In case of
alternatives to cash optimization, holding more current assets in the form of cash was normal by
opinions that excess cash was held in readiness to meeting anticipated future obligations (3.25mean).
In addition, the respondents criticized lack of adequate investment avenues for the excess cash
(3.25mean). The study also established ineffectiveness of minimum liquidity policies (3mean) in the
company which showed a major concern. It was evident also that the company did not have
appropriate tools to enable them project with precision their future cash demands (3.5 mean). Their
weakness was further caused by their low level bank reconciliations and audits to ensure cash safety
(3.5mean).
5.3 conclusion
Based on the obtained findings, the study concluded that Guder Agro Industry working capital
management practices were more conservative than aggressive. The study established that the
29
company receivables were concentrated on sales. However, trade receivables period was shorter than
payables period, indicating that company link receivables to profitability, but it is still not enough.
Regarding payables, there was also the company did not utilize payables, because payables were still
higher than receivables. In inventory management, the company held to much stock (surplus
inventory) unnecessarily for long time, so the company were in a higher stock out risk. Also, the
company established inexperience in order management and control of inventory stocks. Finally,
small amount of cash was held compared to any other current asset signifying higher preference to
liquidity as opposed profitability. Moreover, the company lack innovation in investing the excess
cash and were weak in cash controls. In aggregate, therefore, the weaker financial performance of
the Guder Agro Industry was dependent on the poor and misguided working capital management
practices adopted by the Guder Agro Industry.
5.4 Recommendations of the study

Poor management of working capital means that funds are unnecessarily tied up in idle assets hence
reducing liquidity and also reducing the ability to invest in productive assets such as plant and
machinery, so affecting profitability. In order to improve on the working capital management
practices of Guder Agro Industry. It is recommended that management should establish a credit
control systems preferably with a full time credit officer and follow credit control policy procedures.
Also, the company must have collection policies to ensure that amounts owing are collected as
quickly as possible
Guder Agro Industry did not have proper systems in managing their working capital. This disabled
the company ability in specifically following a definite working capital management policy or
practice. This was not satisfactory especially in today’s computer age where managerial decision
making is vastly supported by customized software systems. We recommended that Guder Agro
Industry are have to build capacity of both financially and technically towards helping in a standard
shift from the manual accounting controls to computerized stages.
The inventory management at the studied company was inadequate in terms of inventory control
management, order management, and inventory shocks. Based on this, the study recommends that
there should be a proper inventory management system to avoid overstock and stock outs, and have
to determined reorder levels. Also, the company should take part in relationship with those
customers who allow long credit time period and those customers who allow short payment period.
30
Finally, we recommend that the company have to reconcile their cash balance in the banks frequently
and employees on finance department are small they need additional employees who support them,
so the company have hire additional new employees whose who have an experience and knowledge.
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APPENDIX.1 QUESTIONIARRIE
BAHIR DAR UNIVERSITY
COLEGE OF BUSINESS AND ECONOMICS
DEPARTEMENT OF ACCOUNTING AND FINANCE

QUESTIONNAIRE ON WORKING CAPITAL MANAGEMENT PRACTICES
This questionnaire is designed to assist the study. That is “working capital management practices in
case of Guder Agro Industry”. Information provided will only be used for purpose of academic
(partial fulfillment of BA degree in Accounting and Finance) and we will be kept the data
confidential.
Note: DEAR RESPONDANT: Please provide specific information in the space provided beside the
question if you choose the option ‘other’ kindly complete it as required.
“No need to write your name and personal information”. Please put tick mark your choice by using
sign shown below and you can to choice more than one answers choice if it is appropriate.
Or
1. What is your gender?
MALE FEMALE
2. What is your educational back ground?
Diploma
33
Degree
Masters (MSc) an above
3. What is your position in the company?
Managing Director
Finance Officer/Accountant
Procurement Manager/Officer
……………………………………………………….. Other’s (specify)
4. How long have you served in the current position (experience)?
Less than 2 years
2 – 4 years
4 – 6 years
6 – 8 years
More than 8 years
5. What is your leading source of your receivables?
Loans and interests
Sales
Subscriptions and fines charge
Return from other investments
………………………………………………………………………........ Other’s (Specify)
6. How many days do you allow prior to actual receipts from day of notice/invoice?
0 days
15 days
15 – 30 days
30 – 45 days
45 – 60 days
More than 60 days
7. From your experience, how would you classify the following tools in terms of their application to realizing the
company receivables? (1-Highly Preferred; 2-Moderately Preferred; 3-Lowly Preferred)
1 2 3
Insistence on cash payment □ □ □

34
Prompt invoicing □ □ □
Sending overdue notices □ □ □
Asset attachment □ □ □
Additional charges □ □ □
Debt Collection services □ □ □
9. How would you classify the company in terms of its credit uptake?
High credit consumer
Moderate credit consumer
Low credit consumer
No credit at all
10. Rank the following creditors depending on their credit-volume advancement to the company.
Suppliers
Lending Institutions
Members
…………………………………………………………………………. Other’s (Specify)
11. What is the company preferred period (days) for credit payment?
0 days
15 days
15 – 30 day
30 – 45 days
45 – 60 days
More than 60 days
35
12. How significant are the following payment techniques to the company? (1-Not Significant; 2-Moderately Significant;
3-Highly Significant)
1 2 3
Payment in installments □ □ □
Negotiation for extensions □ □ □
Change of payment conditions □ □ □
Immediate settlement when cash is available □ □ □
Investing cash to pay at maturity of grace period □ □ □
13. How long (days) does it take to receive ordered goods from suppliers?
Less than 10 days
10 – 20 days
20 – 30 days
30 – 40 days
More than 40 days
14. What is the company key consideration leading to inventory ordering?
Actual demand
Demand projections
Stock replenishment
Unpredictable supply
No definite consideration
………………………………………………………………………….. Other’s (Specify)
15. How common do the following inventory situations affect the company (in the past 3 years)?
High Moderate Low Non-Existent
36
Stock-outs
Inventory surpluses
Emergency ordering
Supply stoppage
16. How would you manage slowing moving/ obsolete inventory?
Dispose them
Sell them at reduced prices
Keep them on the shelves/ warehouse until they are sold
………………………………………………………………………………………….. Other’s (specify)
17. The following statements relate to company efficiency in cash management. To what extent do you strongly agree or
strongly disagree with each of them in the context of your entity (1 strongly agree, 2 agree, 3 neutral, 4 disagree, 5
strongly disagree)?
1 2 3 4 5
There is a well-defined policy on minimum liquidity □ □ □ □ □

There are regular cash flow projections □ □ □ □ □
There are regular bank reconciliations and audits □ □ □ □ □
There are ready investment avenues for excess cash □ □ □ □ □
Excess cash is held to meet future obligations □ □ □ □ □
37
THE END
THANK YOU
APPENDIX 2 INTERVIEW
BAHIR DAR UNIVERSITY
COLEGE OF BUSINESS AND ECONOMICS
DEPARTEMENT OF ACCOUNTING AND FINANCE

Interview ON WORKING CAPITAL MANAGEMENT PRACTICES
This Interview is designed to assist the study. That is “working capital management practices in case
of Guder Agro Industry”. Information provided will only be used for purpose of academic (partial
fulfillment of BA degree in Accounting and Finance) and we will be kept the data confidential.
Would you tell as the qualifications that your organization hire employees for finance department?
Would you aware of models such as the economic order quantity, ABC model, re-order point, just in
time and the computerized inventory control and do u apply this models?
Would you believe the use of computers or technology for stock control as sophisticated?
Would you offer credit beyond just customers, that is, friends and relations?
Would you keep financial statements?
38
APPENDIX 3 WORKING CAPITAL RATIOS
Figure.1 Key working capital ratios (Planware; 2010; Deloof, 2003; Chiou and Cheng 2006)
Ratio Formula
Number of Days Inventories= (Inventories*365)/ Cost of Sales
Inventory Turnover Ratio= sales/inventory
Number of Days Accounts Payable= (Accounts Payable * 365)/ Purchases
Current Ratio= Total Current Assets/ Total Current Liabilities
Quick Ratio = (Total Current Assets – Inventory)/ Total Current Liabilities
Working Capital Ratio= (Inventory + Receivables – Payables)/ Sales
Net Liquid Balance =Cash and Cash Equivalents + Short-term Investment – Short-term Debt +
Commercial Paper Payable + Long-term Debt a Year Term
Working Capital Requirement= Accounts Receivable + Inventories –Account payable+ Accrued

Expenses + Other Payable
Working Capital Turnover Ratio=sales/net working capital
CCC = Inventory days + Trade receivables days − Trade payables days
(Hill et al, 2010) used simpler formula: Accounts Receivable + Inventories – Accounts Payable
39
SCALES
μ=
4
MEDIAN =( N /2)
MODE=Highest frequency
40
APPENDIX 4: FINANCIAL REPORT AND BALANCE SHEET OF
GUDER AGRO INDUSTRY FROM 2012-2014
GUDER AGRO INDUSTRY GUDER AGRO INDUSTRY GUDER AGRO INDUSTRY
PROFIT/LOSS PROFIT/LOSS PROFIT/LOSS

STATEMENT STATEMENT STATEMENT
FROM THE YEAR ENDED
FROM THE YEAR ENDED FROM THE YEAR ENDED
30,JUNE
30,JUNE 2013 30,JUNE 2014
REVENUE REVENUE REVENUE
Main product 30,230,939.90 53,747,398.71 48,215,209.11

sales
Cattle sales 391,217.50 377,913.04 524,634.36
By product 109,054.06 132,826.06 249,956.45

sales
Merchandise 45653.50 53,150.40

sales
Cost of goods 27,873,992.61 48,343,696.48 42,791,126.71

sold
Cost of 27,360,838.00 47,860,157.10 42,221.630.58

product
Cost of cattle 449,057.61 483,939.38 569,496.13
Cost of 64,096.91
merchandise
Gross profit 2,901,872.39 5,967,591.73 6,198,673.21
Operating 8,756,646.19
expenses
Interest 4,666,329.02
41
expense
Selling and 747,349.99

distribution
expense
Administratio 1,657,348.56
n expense
Net operating (1,103,435.84

profit/loss
Other income 3,221,369.34
Net profit/loss 2,117933.50

before income
tax
Net profit/loss 1,421,889.91

after tax
GUDER ARGO INDUSTRY
BALANCE SHEET
AS AT 30 JUNE 2014
42
ASSET:
TANGIBLE
INVESTMENT
LEASEHOLD LAND
CURRENT ASSET:
CASH AND BANK

BALANCE
DEBTORS
STOCK
WITHHOLDING TAX
CURRENT
LIABILITIES:
CREDITORS &
ACRUALS
TAX AYABLE
BANK OVER DRAFT
OBLIGATION UNDER
LEASE AGREEMENT
CURRENT
MATURITY OF
LONGTERM LOAN
PAYABLE TO SHARE
HOLDER
NET CURRENT
LIABILITIES
FINANCED BY:
CAPITAL 1000
SHARES OF BIRR
20,000 PAR VALUE
43
EACH
LEGAL RESERVE
CAPITAL RESERVE
RETAINED EARNING
LONGTERM LOAN
44

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COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT ACOUNTING AND FINANCE

BAHIR DAR, ETHIOPIA

1.2 Back ground of the company

1.3 Statement of the problem

1.4 Research questions

1.5. Objective of the study

1.5.2. Specific objectives

1.6. Significance of the study

1.7. Scope of the study

1.8 limitation of the study

1.9. Organization of the study

Chapter two resents with review of related literature.

Chapter three states research methodologies.

Chapter four also deals with data analysis and interpretation.

Chapter five which is containing summary, conclusions and recommendations.

There are two types of working capital:

1. Permanent working capital and

2. Temporary (fluctuating variable) working capital

New working capital =current asset-current liability

The current ratio =current asset/current liability

Quick (acid- test) ratio =current asset-inventory/current liability

The result shows the liquidity position of the firm.

 Technique of cash management

 Technique of receivable management

 Technique of account payable management

 Technique of inventory management and sources of financing them.

Two major objective of current asset management.

1. Being to minimize cash operating cycle and

2.1.3 CASH MANAGEMENT

2.1.3.1 Conversion Cycle Theory

CCC = Inventory days + Trade receivables days − Trade payables days

2.1.4 ACCOUNT PAYABLES

Number of Days Accounts Receivable= (Accounts Receivable *365)/ Sales

2.1.5 Management of Account Receivables

Number of Days Accounts Receivable= (Accounts Receivable *365)/ Sales

2.1.6 INVENTORY MANAGEMENT

Number of Days Inventories = (Inventories * 365) ÷Cost of Sales

2.2 NEED FOR WORKING CAPITL MANAGEMENT

2.2.1 Balanced working capital position

2.2.2 Determinants of working capital

Nature of the Industry

Nature of the Business

Terms of Purchase and Sales

Current Assets requirements

Inflation or price level changes

Profit planning and control

Firm’s finance and dividend policy

Attitude towards risk

2.2.3 Source of finance

2.3 Empirical Literature

3.4. Sample design and techniques

3.4.2. Sample size

3.5 Source of data

3.6 method of data collection

3.7 Method of data presentation

4.2. Response Rate of personal information

Table 1 Gender of the respondents of Guder Agro Industry

Gender of respondent’s Frequency Percentage Cumulative

Source: survey, 2015

Educational level Frequency Percentages Cumulative percent

Masters and above 0 0

Source: survey, 2015