1.1 BACKGROUND OF THE STUDY
Working capital management is a very important component of corporate finance because it directly affects the liquidity and profitability of the company. The working capital is known as life giving force for any economic unit and its management is considered among the most important function of corporate management. Due to that, every organization whether, profit oriented or not, irrespective of size and nature of business, requires necessary amount of working of working capital (Achchuthan & Kajananthan, 2013). Working capital management is a simple and straight forward mechanism of ensuring the ability of the firm to fund the difference between the short term assets and short term liabilities (Kajananthan & Achchuthan, 2013). It deals with current assets and current liabilities.
There are two basic ways to assess the working capital management of firms. They are balance sheet concept and studying current assets and current liabilities. The Cash Conversion cycle measures the number of days between actual cash expenditures on purchase of raw materials and actual cash receipts from the sale of products or services (Eljelly, 2004). Since every corporate organization is extremely concerned about how to sustain and improve profitability, hence they have to keep an eye on the factors affecting the profitability. In this regard, liquidity management having its implications on risks and returns of the corporate organizations cannot be overlooked by these organizations and hence cash conversion cycle being indicator of the liquidity management needs to be explored as to how it may affect the profitability of the corporate units. Today due to changing world’s economy, advancement of technology and increased global competition among the companies, every company is striving to enhance their profits and for that companies are putting every effort to bring their cash conversion cycle at optimum level to increase profitability.
1.2 STATEMENT OF THE PROBLEM
In order to manage working capital efficiently, a firm has to be aware of how long it takes them, on average, to convert their goods and services into cash. This length of time is formally known as the Cash Conversion Cycle. In order to measure how well a firm manages its working capital, a financial performance metric called cash to cash cycle (abbreviated as CCC) which was developed by Richards and Laughlin (1980). This metric which basically indicates length of the period between paying suppliers and being paid by customers, has three determinants: days payable outstanding, days of inventory and days of receivable outstanding. The concept of cash conversion cycle is a basic financial concept.
It is a composite metric that has been described as “the average days required to turn a dollar invested in raw material into a dollar collected from a customer” (Stewart, 1995).
In another way, Cash conversion cycle is “the length of time a company’s cash is tied up in working capital before that money is finally returned when customers pay for the products sold or services rendered” (Churchill and Mullins, 2001). Cash conversion cycle is a unique financial performance metric that indicates how a firm is managing their capital across the supply chain.
The process for calculating cash-to-cash requires adding days of inventory plus days of accounts receivable and subtracting therefrom, the number of days of accounts payable. Therefore, Cash to Cash bridges material activities with suppliers, production operations, distribution functions, and outbound sales activities. The cash-to-cash metric is important for both accounting and supply chain management perspectives. It can be used for accounting purposes in the determination of firm liquidity and organizational valuation. A shorter Cash to cash cycle, implying that fewer days cash are tied up in working capital and not offset by “free” financing in the form of deferred payments, results in more liquidity for the firm (Soenen 1993). This study attempts to uncover the effect of this metric together with its variables on profitability in the listed information and telecommunication firms in Nigeria.
1.3 OBJECTIVES OF THE STUDY
The objectives of this study include the following:
1. To examine the effect of cash conversion cycle on profitability in telecommunication firms.
2. To examine the role of cash conversion cycle in telecommunication firms.
3. To determine problems confronting telecommunication firms in Nigeria.
4. To make useful recommendations based on the findings of this study.
1.4 RESEARCH QUESTIONS
The following research questions were stated to guide this study:
1. What is the effect of cash conversion cycle on profitability in telecommunication firms?
2. Does cash conversion cycle play any role in telecommunication firms?
3. Are there any problems confronting telecommunication firms in Nigeria?
1.5 SIGNIFICANCE OF THE STUDY
In this study, the researcher sets out to examine effect of cash conversion cycle on profitability in MTN and Globacom telecommunication firms. It would enable telecommunication firms to improve on the system of actual cash and expenditure where lapses are discovered to exist.
The study would also educate those who do not understand what expenditure control entails and also afford those charged with the responsibility of spending funds the opportunity to know if they observed the rules expenditure and hence appropriation of such expenditure.
This study will also help to serve as literature (reference source) to students, individuals, telecommunication sector or corporate bodies into what to carry out on further research on the similar topic.
1.6 SCOPE OF THE STUDY
The study concerns about the effect of cash conversion cycle on profitability in MTN and Globacom in telecommunication sector in Nigeria.