AN APPRAISAL OF THE ROLE OF WORKING CAPITAL MANAGEMENT ON ORGANISATIONAL PERFORMANCE A CASE STUDY OF NIGERIA BOTTLING COMPANY PLC
Working Capital Management: The research provides an appraisal of the role of working capital management on the performance of the organization. It analyses the concept of working capital and provides a detail appraisal of working capital management. In view of the fact, that a large portion of the management time is focused on the internal operations of the firm. Working capital management constitutes a significant factor to determining organizational effectiveness and efficiency. The research provides a case study appraisal of the Nigeria bottling company plc.
1.1. BACKGROUND OF THE STUDY
Working capital refers to a firm’s investment in short term assets e.g. cash, short term securities, trade debtors and stocks. Net working capital is defined as current assets minus current liabilities. Working capital management refers all aspects of the administration of both current assets and current liabilities no new theories or basic principles are involved in working capital management rather these phase of financial management simply requires the application of valuation concepts. Current assets holdings should be expanded to the point where marginal returns on increase in such assets are just equal to the cost of capital required to finance these increases while current liabilities should be used in place of long term debt, whenever their use lowers the average cost of capital.
Working capital management is particularly important for small firms. A small firm may minimize its investments in fixed assets by renting or leasing plant and equipment but there is no way it can avoid an investment in cash debtors and stocks. Therefore current assets are particularly significant for the financial manager of a small firm further because a small firm has relatively limited access to the long term capital market it must necessarily rely heavily on trade credit and short term bank loans both of which affect net working capital by increasing current liabilities.
The relationship between sales growth and the need to finance current assets is close and direct. For example if the firms average collection period is 40 days and if it credit sales are N1000 a day, it will have an investment of N40, 000 in trade debtors. If sales rise to N2000 a day, the investment in trade debtors will rise to N80, 000. Sales increase produce similar immediate needs for additional stocks and perhaps for cash balances. All such needs must be financed and since they arise so quickly it is imperative that the financial manager keep himself aware of development in the working capital segments of the firm, of course continued sales increase will require additional long term assets which must also be financed. However fixed assets investments, while critically important to the firm in a strategic long term sense do not generally have the same urgency as do current asset investments. The research therefore focuses on the role of working capital management on organizational performance with a case appraisal of Nigeria bottling company plc.
1.2. STATEMENT OF THE PROBLEM
The performance of an organization in terms of profit and large sales volume depends greatly on the effective management of the firm’s working capital. However studies reveals that when huge investment have been made on fixed asset as land, building plant and machinery little attention is made on the effective management of the working capital which is the firm’s investment in short term or current asset. Working capital management refers to all aspect of administration of both the current assets and current liabilities. The research problem therefore centers an appraising the role of working capital management on organizational performance with a case study of Nigerian bottling company plc.
1.3. RESEARCH QUESTIONS
1. What is working capital?
2. What is working capital management?
3. What is the role of working capital management on organizational performance?
1.4. OBJECTIVE OF THE STUDY
1. To appraise the concept of working capital.
2. To determine the nature of working capital management.
3. To determine the role of working capital management on organizational performance.
1.5. SIGNIFICANCE OF THE STUDY
1. The study shall provide a detail study on the concept of working capital.
2. The study shall appraise the nature and significance of working capital management.
3. It shall provide useful principles for managers in the management of working capital.
4. The research shall be a source of information on issues on working capital management.
1.6. STATEMENT OF HYPOTHESIS
Ho NBC investment on working capital is low
Hi NBC investment on working capital is high.
Ho working capital management is not given significant attention in NBC
Hi working capital management is given significant attention in NBC
Ho the effect of working capital management on NBC performance is low
Hi the effect of working capital management on NBC performance is high.
1.7. SCOPE OF STUDY
The study focuses on the appraisal of working capital management and the role of working capital management on organizational performance.
1.8. DEFINITION OF TERMS
Working capital defined:
Working capital refers to a firm’s investment in short term assets e.g. cash, short term securities, trade debtors, and stock.
Net working Capital defined:
Net working capital is defined as current assets minus current liabilities.
Working capital management defined:
Working capital management refers to all aspects of the administration of both current assets and current liabilities.
Current asset defined:
Current asset are those asset with a short live span and are easily convertible into cash e.g. debtors, stocks, cash etc.
Fixed asset defined:
These are asset that are permanent in nature and with a long live span e.g. land, building, plant and machinery etc.
Equity capital defined:
This is a part of the authorized capital that is provided by the owner of the business or firm.
AgwuArpaea (1990) Management and Introduction and the Nigerian Perspective Pg 143
Emily Woolf, Suresh, Karam (1988) Organization and Management pg 68
Weston .J; Brigham .E; (1979) Managerial Finance pg 105-125