project

CHAPTER ONEINTRODUCTION

1.1 BACKGROUND OF THE STUDYThe growth and survival of any company depends on a

number of factors. Aside from the collection of talented people, working with the latest technological and mechanical asset, and the performance of a leader, the appropriate management of the financial factors that can help the company even if there is an economic crisis is also important.

Any company aiming to perform well in order to achieve its long and short term goals and objectives should have a sound and effective working capital management. The ability of a company to remain in business for a very long time depends greatly on the efficient management of the components of its working capital. Thus, working capital is important to the financial health of any company of all sizes. This explains the fact that firms with inadequate working capital are in financial straitjacket.

As the name implies working capital refers to the funds that are required for the day to day running of the activities of a firm, it is the excess of current assets over current liabilities. Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to

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ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

Large number of business failure has been attributed to the inability of financial managers to plan and control the current assets and current liabilities of their respective Organizations. This explains why working capital management is vital to firms with limited access to the long term capital market.

Furthermore, the importance of effective working capital management cannot be over looked. Having said that working capital is the live-wire of a business, it is expected that effective provision of it will ensure greater success of a company while in-effective management of it will lead to ultimate downfall of what otherwise might be considered as a prosperous concern.

As a result of the impact of working capital on the overall cost reduction and profitability of companies, this research is therefore a study of Working Capital Management as it contribute to cost reduction and improvement in profitability with particular reference to Cadbury Nigerian PLC.

1.2 STATEMENT OF THE PROBLEMWorking Capital Management is a managerial

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accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Generally speaking the immediate problem facing most financial managers always centers on the best way to ensure suitable survival of the business as well as its expansion in terms of working capital management.

A firm or company should be in a sound working capital position. It should have adequate working capital to run its business operations. One should note that both excessive as well as inadequate working capital position are dangerous to any business, therefore a company is required to maintain a balance between liquidity and profitability which are sometimes conflicting objectives while conducting its day to day activities. However financial managers are faced with the major problem of obtaining an optimum level of working capital, which is a situation whereby working capital managers are able to avoid the problem of holding idle funds, which earns no profit for the firm, and inadequate working capital which reduces the firm's profitability as well as production interruptions and inefficiencies.

The credit policy of a firm is another bottleneck confronting working capital management. A flexible credit policy adopted by the management in most cases results in writing off a high proportion of bad debts while a rigid credit policy reduces the level of sales and also scares away

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customers. Therefore financial managers are faced with the problem of determining an effective and efficient credit policy which should be in line with their company’s goals and objectives.

Fraud is almost in every organization and this is also a big problem to working capital managers, since working capital management requires a substantial part of the capital be held in liquid cash so as to run the day today activities of a firm, financial managers are faced with the task of providing adequate security in order to prevent embezzle of money meant for the organization.

Working capital policy is one of minimizing committed finance whereas working capital management is an optimizing process aimed at filling the minimization policy to operational requirement. This implies that the inefficient and ineffective management of working capital will hinder the growth and survival of the Organization.

1.3 RESEARCH QUESTIONSThis study intends to provide answers to the following questions:i. What are the components of working capital management in Cadbury Nigeria PLC?ii. How effective does the working capital management of

Cadbury Nigeria PLC enhances its profitability? iii. Has Cadbury Nigeria PLC been able to manage its trade

debtors, stock and trade creditors effectively?4

iv. Does Cadbury Nigeria PLC has an optimum level of working capital Management?v. What are the adverse effects of inefficient management of working capital on the company?

1.4 RESEARCH HYPOTHESESThe major area of focus of this study is on the effect of

working capital management on profitability. This will form the basis for formulating the hypothesis which will be tested and validated with a view to making some recommendations.i. Ho: Working Capital Management of Cadbury Nigeria PLC does not enhance its profitability.

H1: Working Capital Management of Cadbury Nigeria PLC enhances its profitability.ii. Ho: Cadbury Nigeria PLC does not have an optimum level of Working Capital Management.

H1: Cadbury Nigeria PLC has an optimum level of Working Capital Management.

1.5 OBJECTIVES OF THE STUDYAn effective and efficient working capital management

is suppose to contribute meaningfully to the development, profitability and the overall growth of any organization. Due to the importance of working capital management, this study is aimed at achieving the following objectives:i. To identify the various components of working Capital in

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Cadbury Nigeria PLC.i. To evaluate the impact of Working Capital Management the profitability of Cadbury Nigeria PLC.iii. To determine whether Cadbury Nigeria PLC managed its trade debtors, stocks and trade creditors effectively.iv. To ascertain if Cadbury Nigeria PLC has an optimum level of Working Capital Management.v. To evaluate the effect of inefficient management of Working Capital in Cadbury Nigeria PLC.1.6 SIGNIFICANCE OF THE STUDY

This study is generally designed for the benefit of all investors and owners of manufacturing companies who have not adopted any policy on working capital management. To the investors and owners of firms, a good working capital management indicates sound liquidity position of the company meaning that the company is well managed, financed and sound. From the research the firm's ability to finance long and short term liabilities is determined. Since investors wish to invest, therefore proper study of the firm's working capital position must not be over looked.

Apart from the above, the study will also highlight certain problems associated with the management of working capital and equally give useful information on the possible means of improvement in the university's library and for other students who may wish to embark on the research of working capital management in future.

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Finally the general public may find this work useful in areas where they wish to broaden their knowledge on working capital management in business organization.

1.7 SCOPE OF THE STUDYThis project is meant to cover the working capital

management in manufacturing companies, with particular reference to Cadbury Nigeria PLC, however, it is restricted to the general management of current assets and current liabilities. The study shall cover a period of five years from 2004 to 2008. Because of the importance working capital management, as a tool for cost reduction and improvement in profitability, the study is been conducted in other to evaluate the effect of working capital on firm’s profitability.

1.8 LIMITATION OF THE STUDYWriting a research of this nature could not be without

its own predicaments. Thus the hardships that were encountered include:Financial constraint, due to the present economic problem, the researcher was highly constrained by inadequate funds which hindered him to go extra mile in search of literatures and other relevant data.

Another limitation was the inability of the researcher to obtain all relevant information from the company, this is as a result of the fact that the company cannot give out certain documents which are tagged as confidential, however the

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researcher made adequate use of the available ones in other to make the project a success.

1.9 DEFFINATION OF TERMS For the purpose of this research the following term are

defined as they were use in the study. i. Working capital: This is the capital or fund available for

carrying on the day to day operations of an Organization.ii. Working Capital Management: It refers to the efficient

management of current assets and current liabilities.iii. Current assets: These are resources that are held or

consumed within a short period of time usually one year. They include stock, cash, debtors, prepayments etc.iv. Current liabilities: These are the amounts failing due to

creditors within a year. It includes trade creditors, bank overdraft, accruals etc.

v. Loan Port Folio: A mixture of shares and bonds held by a firm.vi. Fixed Asset: Assets, which are not readily convertible

into cash and are acquired for long term usage in the firm, e.g. building, plant, machine etc.

vii. Inventories: Inventories are stocks of raw materials, works in-progress and finished goods of a company engaged in manufacturing operations.

viii. Bankruptcy: Where the firm is unable to meet the 8

payment of its debts. The company could not pay its debts and therefore officially declare bankrupt or insolvent.

CHAPTER TWOLITERATURE REVIEW

2.1 CONCEPT OF WORKING CAPITALNo matter how small a company is, there is need for

adequate funds with which its day to day operations is being pursued and this becomes imperative (Madufor, 2006). The level of working capital an organization should maintain in

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order to maximize its profits has been the focus of many writers for the past few decades. The term working capital has been viewed by different people in different ways. Amanda (2007), describes working capital as the short term fund required to run a business at a particular turnover level, while Aborode (2005), defined working capital as the funds invested to finance production such as purchase of raw materials, inventories and provide credit to customers. Working capital has also been described as that portion of capital that oils that wheel of the business since it gives the Organization the ability to pass through financial storms.

Padachi (2006), opined that an Organization should ensure a good synchronization of its assets and liabilities in order to avoid business closure which poses a serious threat to its survival. To maximize the value of the firm has become the most prominent objectives of most Organization as against other objectives. Thus, a financial manager of a business entity is in a dilemma of achieving a desired tradeoff between liquidity and profitability in order to achieve its objectives. The need to maintain an adequate working can hardly be questioned, just as circulation of blood is necessary in human body to maintain life, the flow of funds in an Organization is very vital to enable it grow and survive.

According to Pandey (1993), there are two concept of working capital, the gross concept and the net concept. In

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his definition he opined that gross working capital simply called working capital is the firm's investments in current assets while the term net working is current asset less current liabilities. Mbachu (1988), opined that working capital is used to denote the excess of current assets over current liabilities. He went on to say that this excess is sometimes called net working capital because some businessman considers current assets as working capital. Osibodu (1990), shared some view with Mbachu when he said that working capital is the capital available for conducting the day to day operations of an organization normally the excess of current assets over current liabilities. However, the two concept of working capital gross and net are not exclusive, rather they have equal significance from management view point.

Gross working capital: the gross working capital or current asset focuses attention on two concepts of current assets managements which include (a) Optimum investment in current assets and (b) Financial current assets. Gross working capital is the totality of the current assets of the Organization, which includes stocks (inventory), debtors, bank and cash balance, short-term investment etc. The concept of gross working capital advocates that a firm should posses’ working capital just adequate and sufficient to meet the firm’s operating cycle. It ensures that excess investment in cash is avoided, since excess investment in

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cash results in excess liquidity, thus resulting to high cost of income. This is otherwise known as optimal level in current assets. Excess investment in current assets is avoided.

Net working capital: this is quantified as the excess of total current assets over total current liabilities. It emphasizes continuous liquidity of the firm. The concept advocates a finance of working capital by permanent sources of funds. Examples are shares, debentures, long-term debts, preference shares, retained earnings etc.

However, the two concepts Gross and Net Working Capital are of paramount importance to management. This made Pandey (1993), to stipulate that both concepts are not exclusive but rather they have equal significance from management point of view. He was also of the opinion that there is no precise way to determine the extent of amount of gross or net working capital for every firm. The data and problems of each organization should be analyzed to determine the amount of working capital needed.

The net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. Thus working capital represents the money required for the purchase of raw materials, payment of salaries, wages and other expenses and for financing the interval between the data of supply of goods and data of receipts of payment for those goods.

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The consideration for the level of investment in current assets should avoid two danger points, excessive and inadequate investment in the current assets. Investment in current asset should be just adequate, not more or less the needs of the business firms within the industries. Inadequate amount of working capital can threaten the solvency of the firm if it fails to meet its current obligations. It should be realized that the working needs of the firm may be fluctuating with changing business activities. This may cause excess or shortage of working capital frequently. The management should be too prompt to initiate an action and correct the imbalance.

Secondly, the other aspect of the gross working capital points to the need for arranging funds to finance current assets. Whenever a need for working capital funds arises due to the increasing level of business activities or for any other reason the arrangement should be made quickly. Similarly if some surplus funds arise, they should not be allowed to remain idle, but should be invested in short term securities. Thus, the financial manager should have knowledge of the sources of working capital funds as well as the investment avenues where the idle funds may be temporarily invested.

Finally, it may be emphasized that gross and net concepts of working capital are two important facets of working capital management. There is no precise way to

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determine the exact amount of gross and net working capital for every firm. The data and problems of each company should be analyzed to determine the amount of working capital. There is no specific rule in which current assets should be determined or financed. It is not feasible in practice to finance current assets by short term sources only. Keeping in view the constraints of the individual company a judicious mix of long term financing should be invested in current assets.

2.2 IMPOTANCEANCE OF WORKING CAPITAL MANAGEMENT

Working capital management is a very important component of corporate finance because it directly affect the liquidity and profitability of a company. It deals with current asset and current liability. Working capital management is important due to many reasons. For one thing, the current asset of many manufacturing firms accounts for over half of its total assets. For a distribution company, they account for even more. Excessive level of current assets can easily result in a firm realizing a substandard return on investment. However firm with too few current asset may incur shortage and difficulties maintaining smooth operations. An efficient working management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet due short term obligation on the one hand and avoid excessive investment

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on the other hand. In addition, working capital decision are sensitive in the financial area but the level of different working capital components becomes frequent, repetitive and time consuming which makes the working capital part of the firm’s profitability (Raheman and Nasr, 2007).

There are many aspects of working capital management which makes it an important function of the financial manager. Working capital management requires much of financial managers time. Empirical observation showed that financial managers have to spend much of their time to the daily internally operations, relating to current assets and current liabilities of the firm. Because of this it is necessary to get maximum benefits. The management of working capital involves the following;(i.) Provision of funds to finance current assets.(ii.) Determination of optimum level of working capital to be kept.(iii.) Specific controls over the individual elements of

working capital stocks, cash debtors and creditors.Working Capital represents a large portion of the total

investment in assets. Current assets represent more than half the total assets of business firms, because they represent a large investment and because this investment tend to be relatively volatile current assets are worthy of financial managers careful attention.

2.3 THE NEED FOR WORKING CAPITAL15

The need for working capital to run the day to day business activities of a firm cannot be over-emphasized. The fundamental concept in assessing the working capital needs of an organization is the operating cycle of the organization and the firm's sales activities. The normal operating cycle referred to is the time required for cash to be converted into inventory, inventory into receivables and receivables ultimately into cash. In assessing the working capital needs of an organization, Alex Mbachu assert that, "the longer the operating cycle, the more financial resources organization needs and working capital management is concerned with keeping the operating cycle to its shortest length ". The operating cycle for manufacturing organization is longer than that of marketing organizations. It should be noted that the operating cycle per se does not give the amount of working capital needed but serves as a useful indicator of efficient utilization of resources.

By using relationship between sales and the relevant items of working capital an estimate can be obtained of the working capital required to finance a given level of sales. The only problem here is that of estimating the satisfactory level of working capital items required. However, a number of factors influence the working capital needs of firms. Amongst the factors are: the nature and size of business, manufacturing cycle, business fluctuation, production policy, firm's credit policy, availability of credit firm's growth and

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expansion activities, profit margin and profit appropriation, price level, changes and finally operating efficiency of firms.

Furthermore, the need for working capital is directly related to sales growth. As Sales grow, the firm needs to invest more inventories and book debts. These need become very frequent and fast when sales grow continuously. The financial manager should be aware of such needs and finance them quickly.

2.4 PROFIT AS A MEASURE OF FIRMS PERFORMANCEThe primary objective of business is to produce and sell

goods for profit, through the satisfaction of human wants. A business which does not earn profit cannot stay in the market for a longer period. The income of enterprise, therefore, must exceed expenditure over a period of time. Profit is necessary for a company to insure its own survival, growth and expansion. In the Words of Drucker, “the problem of any business is not the maximization of profit but the achievement of sufficient profit to cover the risk of economic activities and thus to avoid losses”. It is clear from the above definition that a business enterprise should work for reasonable profit which should cover its own future risk.

Business organization will also want to maximize their shareholders wealth and the extent to which this wealth maximized depends on how much profit is made. Again one of the major characteristics of a commercial organization is profit motive since "the earning of profit is after all, usually

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the main reason why the business was set up in the first place, and the proprietor will want to know for various reasons how much profit has been made". The business organization would want to know its profits for diverse reasons as to assist it plan ahead, to help it obtain loan from creditors, to show a prospective buyer or may be, to know its profits for income tax purposes.

From the foregoing it could be seen that the main objective of a business organization is to make profit and thus it serves as a good parameter for measuring firms performances.

2.5 COMPONENTS OF WORKING CAPITALThe components of working capital are generally

classified into two broad categories namely; Current assets and Current liabilities.

2.5.1 MANAGEMENT OF CURRENT ASSETSWilliam Pickless (1982), defined current assets as those

assets which are made or acquired and merely held for a short period of time, with a view to sale at a profit in the ordinary course of business, that is to say they are easily convertible into cash. These assets includes; Inventory (Stock), Cash, Debtors and Marketable Securities. Management of current assets involves the problem of

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determining the optimum level of investment in cash asset. i. Management of Inventory

Bealey and Stewart (1981) defined inventory as "the stick of the product a company is manufacturing for sale and the components that make up the product". Such inventories are stated as follows; raw materials, work-in-progress or finished goods awaiting sale.

These inventories provide very crucial links between the production (Raw materials) and sales (partially processed and finished goods) efforts of companies by enabling them to offer the best type of customer service at minimum cost. Apart from this feature, investments in inventories by most companies are usually substantial and in general accounts for about one third of total assets". However inventory is considered important from three perspectives namely; it makes available a balance of inflows and outflows of stock throughout production period. Secondly, inventory provides safety stock in case, interruptions in production occur. And sometimes, production is not entirely meant for immediate consumption instead a future need is anticipated. In this direction, inventory is made available to meet future growth needs of a firm. For these reasons, proper inventory planning is very important and normally forms part of the budgetary process. Thus, the aim of inventory management should be to avoid excessive and inadequate levels of inventories and to maintain sufficient inventory for the smooth production

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and sales operations.ii. Management of Cash

Cash as one of the component of current asset form a crucial portion of working capital structure of a company. The presence or absent of cash in a business concern tells how liquid the it is or the extent of its illiquidity. The management of cash is concerned with managing the cash flows into and out of the firm, cash flows within the firm and cash balances held by firms at a point in time. The aim of cash management is to maintain adequate cash balance in order to keep the firm sufficiently liquid and to invest excess cash in some profitable ventures.

A company needs to keep sufficient cash to keep its business running smoothly. Inadequate cash will disrupt the firm’s operation and can lead to insolvency. According to Olowo (1998), excessive cash will tie down the unnecessarily long term capital with a result that either return on capital will be low. Thus, a firm needs to maintain sound cash position. Generally, a reasonable cash balance is kept to pay of current liabilities monthly when they fall due.

According to Lord Keynes in Paul A. Samuelson (1989), business or firms have three primary motives for holding cash, they include; transaction, precautionary and speculative motives.

Transaction Motives: The transaction motive requires a firm

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to hold cash to conduct its business in ordinary course. According to Richard Lipsey (1993), the transactions demand for money arises because of the iron synchronization of payments and receipts. Therefore the transaction motive mainly refers to holding cash to meet anticipated payments where timing is not properly matched with cash receipts.

Precautionary Motive: Precautionary motive is the need to hold cash to meet any contingencies in future, whereas the transaction demand arises from the certainty of non synchronization of payments and receipts. Lipsey was of the view that, the precautionary demand arises from uncertainty about the degree of non synchronization. It provides caution or buffer to withstand unexpected emergency.

Speculative Motive: The speculative motive relates to the holding of cash for investing in profit making opportunities as and when they arise. Speculation is always made on securities.

Thus, the primary motives to hold cash and marketable securities are the transactions and precautionary motives. However, firms must decide the quantum of transactions and precautionary balances to be held.

iii. Management of DebtorsDebt management otherwise known as management of

account receivable is concerned with the efficient management of

debtors to achieve an optimum level of debt in the firm’s working

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capital investment. Managing debtors is a problem of balancing

liquidity and profitability. Planware (2006), asserts that, firms can

significantly enhanced their cash flows if the amounts owed to the

business are collected faster. Thus every business needs to know

who owes them money, how much is owed, how long it is being owed

and for what it is owed.

Debtors include accounts receivables as such its importance to

the firm cannot be over emphasized, this is due to the fact that such

debt are tied down capital and could impact negatively on the liquidity

of the firm. On the other hand, business operations can go

uninterrupted without credit being allowed to customers since it is

necessary as the initial capital needed to start a business. Thus,

sales may be lost or reduced if no credit is allowed to customers

whose paying ability is in little, while too rigid credit policy may lead a

firm into losing its goodwill and customers.

The failure of most organization could be attributed to the

problem of liquidity arising from extended credit terms and the

resulting cash flow problem. This is as a result of the fact that there is

no sound credit management system which sets the credit limit,

systematic demand procedure, proper legal enforcement method on

the credit extended to customers. The effective and efficient management of accounts receivable should therefore deal with establishing viable credit and collection policies. A good policy seeks to strike a reasonable balance between sales, bad debts and losses. A collection policy should be designed to keep the level of investments in receivables at appropriate level.

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iv. Management of Marketable SecuritiesThese are securities that can be sold in short notice for

close to their quoted market prices. There is a close relationship between cash and market securities. Firms sometimes report reasonable amounts of such short term marketable securities as treasury bills, or bank certificates of deposit among their current assets. Therefore, the investment in marketable securities should be properly managed.

2.5.2 MANAGEMENT OF CURRENT LIABILITIESCurrent liabilities are obligation that must be paid

within the operating cycle or within one year. Mbachu (1990), termed current liabilities as principal obligations whose liquidity is reasonably expected to require the use of existing resources, properly classified as current assets or the creation of other current liabilities. Current liabilities include such obligation as account in acquisition of materials, collection received in advance of delivery of goods or performance of service or debts. In general current liabilities include the following: Creditors, bank loan and over draft, tax and other expenses.

i. Management of CreditorsCredit management otherwise known as management

of account payable is concerned with short term credit financing. The management of trade creditor is the mirror

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image of the management of trade debtors. One firm’s trade debtors are another firm’s trade creditors. Creditors are a vital part of the component of working capital and should be managed in an efficient and effective way to enhance the firm’s cash position. A firm in managing its trade creditors should attempt to obtain satisfactory credit periods from suppliers. However, care must be taken to maintain good relationships with regular and important suppliers. This is because a good supplier is one who will work with you to enhance the future viability and profitability of a company.

Trade credit as a discount policy is an important source of free financing. However, if the supplier offers a cash discount and the firm do not take advantage of it, there is an implied interest cost of credit. Thus, the management of creditors’ ad suppliers is just as the management of your debtors. However, a company should avoid delaying trade credit unnecessary so as not to lose loose supplier’s goodwill.

ii. Bank Overdraft and Other Short Term Funds

A bank overdraft is one of the most common forms of short-term finance. It is really a loan arrangement whereby a trading bank allows a business (grants an overdraft facility) to make payments from its current banking account and put the account into 'debit' up to an agreed limit. A bank overdraft is part of working capital and is reported in the position statement as a current liability. It is a flexible source

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of finance as it fluctuates according to the firm's needs and the business can pay in or withdraw cash when convenient. But it attracts a relatively high interest rate so it should only be used until the normal trading cycle eliminates the temporary cash shortfall.

iii. Taxation Management

Proper taxation management an organisation contributes to the financial management performance of the Government. In addition to minimising the risk of the financial cost of non-compliance, it reduces negative non-financial impacts, such as adverse publicity or loss of public confidence in the organisation’s financial management. Taxation management is closely aligns with risk management. Some risks associated with poor taxation management include incorrect treatment of receipts and payments, lost input tax credits, loss of Agency credibility and impact on Headline Budget Measures.

2.6 WORKING CAPITAL RATIOSRatio analysis is the tool with which financial statement

are analyzed. The use of ratios is indispensable if the strengths and weaknesses or the firm must be ascertained, improved upon and corrected. Osisioma (1990) defined ratio analysis as "the technique of reducing aggregate financial data into meaningful ratios for the purpose of obtaining measures of liquidity, solvency, stability and profitability".

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John V. (1972) had it that, "ratio analysis is the process of identifying the financial strengths and weakness of the firm by properly establishing relationships between the items of the balance sheet and profit and loss account". Thus financial ratio relates one set of values to another, with the resulting quietness serving as a measure, a standard or a room by which performance is judged.

It is useful to classify ratios into four fundamental types with emphasis on working capital management. Liquidity Ratio: This measures the firm's ability to meet its maturing short term obligations. Among these are:i. Current Ratio: Which indicates the extent to which the claims of short term creditors are covered by current assets?ii. Acid Test Ratio: Which measures the firm’s ability to pay

off short term obligations without relying on the sale of inventories?

iii. Leverage Ratio: This ratio measures the extent to which the firm has been financed by debt.iv. Activity Ratio: This measures management overall effectiveness as shown by the returns generated on sales and investment. Examples are:

(a) Net profit on sales ratio - which gives profit per naira of sales.

(b) Rate of Return on assets - which measures the return on total investments in the firm.

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(c) Rate of Return on capital employed - which is an efficiency guard to show the intensity and profitability of overall capital usage

2.7 FACTORS AFFECTING WORKING CAPITAL Firms maintain different levels of working Capital which invariably influences the level of liquidity position of the organization. This is as a result of the fact that the level of working capital requirements in these firms are influenced by many factors and these are:i. The Business Environment

The environment of the business represents the total of surrounding factors which affects the operations of business. The factors are economic, political, legal, socio–cultural, technological, customers etc. Example, if the economy is in boom era, the business might require investment in stocks.ii. The Nature and Size of the Business

The working capital requirement of a firm is a function of the nature of such firm which is different from that of another firm. Large manufacturing firm like Cadbury Nig. Plc require high working capital due to its carrying a large stock of variety of goods.iii. Firm’s Credit Policy

The more efficient the company’s credit policy, the lesser the operating cycle and the lower the working capital required. The credit policy is measured by ability to reduce the operating cycle without any side effect on the goodwill of

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the company in terms of relationship with the customers.iv. Operating Cycle

All things being equal, the longer the operating cycle, the larger the working capital required for the period. Hence, reducing the operating cycle means reduction in the amount of working capital needed.v. Price Level Changes

The price of commodities has a direct effect on working capital needed. During inflationary periods, firms will require not only investment in fixed assets but also in working capital.vi. Operating Efficiency

The ability of a company to keep its costs at minimum and reasonable level means the reduction in working capital needs of such company. On the other hand, increase in running costs means increase in working Capital needs of the company.vii. Business Fluctuation

Movement of sales determines the working capital requirements of the company. There are some festive periods when demand increase also the working capital needed to meet this demand will increase.

2.8 STUDIES ON WORKING CAPITALMany researchers have studied working capital from

different views and in different environments. The following ones were very interesting and useful for this research.

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Eljelly (2004), elucidated that efficient liquidity management involves planning and controlling current assets and current liabilities in such a manner that eliminates the risk of inability to meet due short-term obligations and avoids excessive investment in these assets. The relation between profitability and liquidity was examined, as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia using correlation and regression analysis. The study found that the cash conversion cycle was of more importance as a measure of liquidity than the current ratio that affects profitability. The size variable was found to have significant effect on profitability at the industry level. The results were stable and had important implications for liquidity management in various Saudi companies. First, it was clear that there was a negative relationship between profitability and liquidity indicators such as current ratio and cash gap in the Saudi sample examined. Second, the study also revealed that there was great variation among industries with respect to the significant measure of liquidity.

Deloof (2003) discussed that most firms had a large amount of cash invested in working capital. It can therefore be expected that the way in which working capital is managed will have a significant impact on profitability of those firms. Using correlation and regression tests he found a significant negative relationship between gross operating

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income and the number of days accounts receivable, inventories and accounts payable of Belgian firms. On basis of these results he suggested that managers could create value for their shareholders by reducing the number of days’ accounts receivable and inventories to a reasonable minimum. The negative relationship between accounts payable and profitability is consistent with the view that less profitable firms wait longer to pay their bills.

Ghosh and Maji (2003), in their paper made an attempt to examine the efficiency of working capital management of the Indian cement companies during 1992–1993 to 2001–2002. For measuring the efficiency of working capital management, performance, utilization, and overall efficiency indices were calculated instead of using some common working capital management ratios. Setting industry norms as target-efficiency levels of the individual firms, this paper also tested the speed of achieving that target level of efficiency by an individual firm during the period of study. Findings of the study indicated that the Indian Cement Industry as a whole did not perform remarkably well during this period.

Shin and Soenen (1998), highlighted that efficient Working Capital Management (WCM) was very important for creating value for the shareholders. The way working capital was managed had a significant impact on both profitability and liquidity. The relationship between the length of Net

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Trading Cycle, corporate profitability and risk adjusted stock return was examined using correlation and regression analysis, by industry and capital intensity. They found a strong negative relationship between lengths of the firm’s net trading Cycle and its profitability. In addition, shorter net trade cycles were associated with higher risk adjusted stock returns.

Smith and Begemann, (1997) emphasized that those who promoted working capital theory shared that profitability and liquidity comprised the salient goals of working capital management. The problem arose because the maximization of the firm's returns could seriously threaten its liquidity, and the pursuit of liquidity had a tendency to dilute returns. This article evaluated the association between traditional and alternative working capital measures and return on investment (ROI), specifically in industrial firms listed on the Johannesburg Stock Exchange (JSE). The problem under investigation was to establish whether the more recently developed alternative working capital concepts showed improved association with return on investment to that of traditional working capital ratios or not. Results indicated that there were no significant differences amongst the years with respect to the independent variables. The results of their stepwise regression corroborated that total current liabilities divided by funds flow accounted for most of the variability in Return on

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Investment (ROI). The statistical test results showed that a traditional working capital leverage ratio, current liabilities divided by funds flow, displayed the greatest associations with return on investment. Well known liquidity concepts such as the current and quick ratios registered insignificant associations whilst only one of the newer working capital concepts, the comprehensive liquidity index, indicated significant associations with return on investment.

All the above studies provide us a solid base and give us idea regarding working capital management and its components. They also give us the results and conclusions of those researches already conducted on the same area for different countries and environment from different aspects. On basis of these researches done in differentCountries, we have developed our own methodology for research.

2.9 HISTORICAL BACKGROUND OF CADBURY NIGERIA PLC

Cadbury Nigeria Plc is a leading company in confectionary, food drink and food products whose quality and brands are enjoyed throughout the entire nation as well as in our export markets around the world. The origin of the business stretches back to the 50’s, first as an activity to source cocoa beans, while simultaneously prospecting for opportunities to serve the local consumers with the famous Cadbury products.

32

An initial packing operation established in the early 60’s to pack imported bulk consumer products grew rapidly into a full-fledged manufacturing outfit. The company was incorporated in January 1965 when the current four (4) hectare factory site was also opened and subsequently went public in 1976.

The philosophy of the business from inception was to build and sustain a solid foundation for providing functional and affordable products that help enhance the quality of life of consumers, while developing a mutually beneficial relationship with the wider community in which it operates. This heritage of caring has been the underlying principle that governs their relationship with consumers, customers, shareholders, suppliers, employees and society at large; as well as the company’s policies on the environment, corporate governance, ethical trading, human rights, safety at work, diversity and equal opportunity employment practices.

These carefully nurtured traditions enabled the company provide brands, products, financial results and manpower capacity of less than 200 to over 2000 employees who have chosen to make a career in Cadbury. They are the embodiment of talents, skill, knowledge and other intelligent property behind the success of the business.

Today, Cadbury has a broad portfolio of well established product many of which were developed locally. These

33

include: Cadbury Bourn vita (The lead brand), Richoco (Rich chocolate drink), Tom-Tom (big black sweet with white stripe), Trebor Peppermint Original (TPO), Butter mint, malta sweet and a host of others.

As part of their effort to use local raw materials as much as possible, their pioneering cereal conversion plant processes nearly 30,000 tons of sorghum grains annually, into glucose and malt extract primarily to feed the confectionary and food drinks plant. Cadbury also made a major investment to establish a cocoa performance that meets the interests of their numerous stakeholders. A rising profile of performance, driven by a robust business model also means increasing taxes to Government.

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CHAPTER THREERESEARCH METHODOLOGY

3.1 METHOD OF DATA COLLECTIONData for this study were collected from both primary

and secondary sources. The secondary source constituted of existing literature and data extracted from the Annual Reports and Accounts of Cadbury Nigeria PLC mainly the profit and loss and balance sheet statements for five years period from 2004 to 2008 were used in gathering financial data and computing various ratios used in answering the research questions and testing the hypotheses.

For the purpose of gathering information that could not be obtained through the secondary data, the primary source of data collection was employed using basically the questionnaire. The questionnaire consists of a set of questions designed by the researcher in relation to the research topic and administered to all the relevant personnel involved in the administration of the company working capital. A total number of forty (40) questionnaires were distributed to the staff of the company drawn from both the

35

senior, middle and junior level staffs. The reason for using the questionnaire was to enable the researcher to collect information that could not be obtained from the Annual Accounts of the company.

3.2 METHOD OF DATA ANALYSISIn the presentation of data collected, the use of tables

will be employed. The method of data analysis for this research will be the use of simple percentages and ratio analysis. The reason for using this method is to enable the researcher compare and group information and data accordingly. The computation of ratios shall be limited to those that have to do with working capital of the company. These ratios include: Current ratio = Current Assets

Current Liabilities

Acid test ratio = Current Assets - Stock Current Liabilities

Stock Turnover = Closing Stock x 365Sales

Debtors collection period = Trade Debtors x 365Sales

Creditors payment period = Trade Creditors x 365Cost of sales

Returns on working capital = Profit before interest and tax x 100 Working Capital

36

In testing the hypotheses, two statistical techniques will be used, that is the Correlation coefficient and the Chi-square statistical technique. Hypothesis one (H1) will be tested using correlation coefficient (r) in order to test the relationship between working capital and profitability. The formula is given as:

r = ∑xy -∑x(∑y) [n∑x2 - (∑x)2] [n∑y2 - (∑y)2]While Hypothesis two (H2) will be tested using Chi-square statistical technique in order to test the optimum level of working capital management in Cadbury Nigeria PLC. The formula is given by:

Xc2 = (O – E) 2

E

Where: Xc2 = Calculated Chi-square

O = Observed frequencyE = Expected frequency derived by (CT)(RT)

GT

Where: CT =Column totalRT = Row totalGT = Grand total

This tool will be applied by checking the corresponding chi-square table (Xt

2) with the degree of freedom calculated as (r-1)(c-1) under 5% level of significance.

37

CHAPTER FOUR DATA PRESENTATION AND ANALYSIS

4.1 DATA PRESENTATIONAs earlier stated in chapter three, there are two types

of data collected for the purpose of this study, that is, the primary and the secondary data. However the presentation of data will only focus on the secondary data while the primary data will be presented along with its analysis under the data analysis subsection.

Five research questions were formulated in this study, all directed towards determining the effect of working capital management on the profitability of Cadbury Nigeria PLC. The first three (3) research questions will be answered using the secondary data obtained from Cadbury Nigeria PLC annual account from 2004 to 2008, while the other two (2) research questions will be answered using the primary data obtained through questionnaire. The following secondary data presented below constitute the working capital variables, they helped to highlight the working capital position of the

38

firm.

4.1.1 Components of working capital in Cadbury Nigeria PLC

There are two components of working capital in Cadbury Nigeria PLC, they include the current assets and the current liability. These components of working capital are presented in the tables below.

Table 4.1: Current AssetsYears

Stock Debtors

Prepayment

Due from Subsidiary

Bank & Cash

Total

N’m N’m N’m N’m N’m N’m2004

4,911 5,029 32 773 2,661 13,407

2005

4,901 9,130 190 470 7,699 22,390

2006

6,174 3,055 16 1,480 2,879 13,604

2007

2,293 1,361 85 1,570 2,056 7,365

2008

2,951 2,397 59 813 1,554 7,774

Source: Annual Accounts of Cadbury Nig. PLC (2004-2008). *(N‘m) All values in billions

39

Table 4.1, shows the current asset of Cadbury Nigeria PLC for the five years starting from 2004 to 2005. It also shows the constituents of the company’s current assets which include stocks, debtors, prepayment, and amount due from subsidiary and cash in hand and at bank.

Table 4.2: Current LiabilitiesYears

Bank overdraft Borrowing

Trade Creditors

Taxation

Other Liabilities

Total

N’m N’m N’m N’m N’m2004

2,029 2,023 545 4,419 9,019

2005

5,528 2,623 750 3,981 12,882

2006

16,570 2,447 7 3,433 22,457

2007

15,075 1,399 7 3,985 20,466

2008

15,150 1,715 1 5,336 22,202


Table 4.2, shows the current liability of Cadbury Nigeria PLC for the five years starting from 2004 to 2005. It also shows the constituents of the company’s current liability which include bank overdraft and short term borrowing, trade creditor, taxation, and other liabilities which include

40

accruals and dividend payable.

4.1.2 Relationship between working capital and profitability

In determining the relationship of working capital management on the profit of Cadbury Nigeria PLC, the Working capital of the company and Profit Before Interest and Tax (PBIT) will be used in computing the correlation in order to ascertain the type of relationship that exist between them.Table 4.3: Computation of working capitalYears 2004 2005 2006 2007 2008

N’m N’m N’m N’m N’mCurrent Asset

13,407 22,390 13,604 7,365 7,774

Current Liability

(9,016) (12,882)

(22,457)

(20,466)

(22,202)

Working Capital

4,391 9,508 (8,853) (13,101)

(14,428)


Table 4.3 shows the computation of working capital in Cadbury Nigeria PLC. As it can be seen the working capital of the company in 2004 and 2005 were in a positive position. This indicates that the company was able to settle its immediate obligations. However in 2006, 2007 and 2008 the company’s working capital were in a negative position

41

making it difficult for the company to meet its immediate obligations.

Table 4.4: Working capital and PBITYears 2004 2005 2006 2007 2008

N’m N’m N’m N’m N’mPBIT 3,891 3,937 (1,841) (2,461) (1,320)

Working capital

4,391 9,508 (8,853) (13,101)

(14,428)


Table 4.4, shows the Profit Before Interest and Tax compared with working capital of the company. The PBIT in 2005 was a bit higher than that of 2004, but from 2006 to 2008 the company made losses. Looking at the PBIT compared to the working capital, it can be easily seen that when the PBIT of the company were positive the working capital were positive but when the PBIT were negative the working capital of the company were also negative.

4.1.3 Management of Stocks, Debtors and Creditors

In other to determine if the company is utilizing its recourses efficiently, the efficiency ratios will be computed, these ratios include stock turnover, debtor’s collection period and creditor’s payment period. The following are the data to

42

be used in computing the ratios.

Table 4.5: Management of StockYears 2004 2005 2006 2007 2008

N’m N’m N’m N’m N’mStock 4,911 4,901 6,174 2,293 2,951Sales 20,084 27,444 16,298 18,018 21,727Source: Annual Accounts of Cadbury Nig. PLC (2004-2008). *(N‘m) All values in billions

Table 4.5, shows the stocks and the sales value of the company. These data will be employed in calculating the stock turnover ratio and the number of days stocks are held in the company.

Table 4.6: Management of DebtorsYears 2004 2005 2006 2007 2008

N’m N’m N’m N’m N’mTrade Debtors

5,029 9,130 3,055 1,361 2397

Sales 20,084 27,444 16,298 18,018 21,727Source: Annual Accounts of Cadbury Nig. PLC (2004-2008). *(N‘m) All values in billions

Table 4.6, shows the trade debtors and the sales value of the company. These data will be employed in calculating the number of days it takes for the company to collect money from its debtors.

Table 4.7: Management of CreditorsYears 2004 2005 2006 2007 2008

N’m N’m N’m N’m N’m

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Trade Creditors

2,023 2,623 2,447 1,399 1,715

Cost of Sale

12,265 17,465 9,983 13,445 15,021


Table 4.7, shows the trade creditors and the cost of sales value of the company. These data will be employed in calculating the number of days it takes the company to pay its creditors.

4.2 DATA ANALYSIS (SECONDARY DATA)In analyzing the secondary data, percentages and

financial ratios will be computed and thereafter the interpretation shall follow. The reason for using this method was because, financial ratio is largely concerned with the efficiency and electiveness of resources utilization by the company's management and also with the financial stability of the company.

4.2.1 Component of Working Capital AnalysisThe percentage of individual working capital

components of Cadbury Nigeria PLC are computed below together with their interpretation starting with current assets.Table 4.8: Current Assets Analysis (%)Years

Stock Debtors

Prepayment

Due from Subsidiary

Bank & Cash

Total

44

% % % % % %2004

36.6 37.5 0.2 5.8 19.9 100

2005

21.9 40.8 0.9 2.1 34.3 100

2006

45.4 22.5 0.1 10.9 21.1 100

2007

31.1 18.5 1.2 21.3 27.9 100

2008

38 30.8 0.8 10.4 20 100

Source: Computed from Table 4.1The table above shows the percentages of various

items that make up the current asset of the company. The table shows that Cadbury Nigeria PLC in 2004 and 2005 held most of its current asset in debtor’s value representing 37.5% and 40.8% respectively. While in 2006, 2007 and 2008, the majority of the current asset value was held in stocks, which represent 45.4% in 2006, 31.1% in 2007 and 38% in 2008.

Prepayment was 0.2% in 2004, increase in 2005 to 0.9%, however in 2006 it reduce to 0.1% but in 2007 the value increased to 1.2% and finally reduced to 0.8% in 2008. Prepayment has the lowest proportion of current asset in all the five years under review. The proportion of the amount due from subsidiaries was 5.8% in 2004, reduced to 2.1% in2005, increased to 21.3% in 2007 and later reduced to

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10.4 in 2008.The proportion of cash in hand and bank were held

moderately in all the years under review, 2004 had the lowest proportion with 19.9%, while 2005 had the highest proportion with 34.3% of current asset.

Table 4.9: Current Liabilities Analysis (%)Years

Bank overdraft & Borrowing

Trade Creditors

Taxation

Other Liabilities

Total

% % % % %2004

22.5 22.4 6.1 49 100

2005

42.9 20.4 5.8 30.9 100

2006

73.7 10.9 0.1 15.3 100

2007

73.6 6.8 0.1 19.5 100

2008

68.2 7.7 0.1 24 100

Source: Computed from Table 4.2Table 4.9, shows the current liabilities of the company

which consist of bank overdraft and other short term borrowing, trade creditors, taxation and other liabilities. Looking at the table closely, it can be seen that Cadbury Nigeria PLC has 49% of its current asset in 2004 in other liabilities which has the highest proportion of current asset in

46

that year, while taxation has the lowest proportion with 6.1% for 2004.

In the years 2005, 2006, 2007 and 2008, bank overdraft and other short term borrowing has the highest proportion with 42.9%, 73.7% 73.6% and 68.2% respectively. Trade creditors was 22.4% in 2004, reduced slightly to 20.4% in 2005, however in 2006 it further reduce to10.9%, the proportion reduce to 6.8% in 2007 and finally increase a little in 2008 to 7.7%.

Taxation in 2004 and 2005 were 6.1% and 5.8%, while in 2006, 2007 and 2008, the proportion of tax were not up to one percent of the company’/s current liabilities, this might be as a result of the losses the company made those three years.

4.2.2 Liquidity Ratio Analysis The liquidity ratio tries to assess the liquidity or

solvency position of a company. In analyzing the liquidity position of Cadbury Nigeria PLC, the current ratios, acid test ratios and returns on working capital will be computed.

Table 4.10: Current RatioYears 2004 2005 2006 2007 2008Current Ratio

1.5:1 1.7:1 0.6:1 0.4:1 0.3:1

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Source: Computed from Table 4.1 and 4.2

Current ratio compares total asset and total liabilities and is intended to indicate whether there are sufficient short term assets to meet the short term liabilities. A glance at the ratios between the periods under review portrayed poor working capital management. This was because the company’s current assets over the years under reviews were below the industry average of 2 times the current liabilities. In fact, in 2006, 2007 and 2008, the current liabilities were more than the current assets of the company. This might be as a result of the company over investing its liquid resources in illiquid assets, such that cash and near cash resources were so depleted that maturing business obligations could not be met.

Table4.11: Acid TestYears 2004 2005 2006 2007 2008Acid Test 0.94:1 1.36:1 0.33:1 0.25:1 0.22:1Source: Computed from Table 4.1 and 4.2

The acid test ratio indicates the ability of the company to met its short term liabilities from its current assets without having to sell inventories. The ratio gives a better view of the liquidity position of a company since inventories are said to be the least liquid of a firm's current assets and the assets on which losses are likely to occur in event of liquidation. Table 4.11, showed the tabulated values of the acid test ratios. Unlike the current asset already analyzed the acid

48

test ratios shows, that it was only in 2005 that the company’s current asset (less inventories) was a bit higher than the current liabilities, while in 2004, 2006, 2007 and 2008 the company’s credit worthiness would be endangered as it might not be able to meet emergency payments of its short-term liabilities, because of the bad acid test ratios.

Table4.12: Returns on Working CapitalYears 2004 2005 2006 2007 2008

% % % % %Returns on Working Capital

88.61 41.41 20.8 18.78 9.15

Source: Computed from Table 4.4

Returns on Working Capital show the relationship between working capital and profitability (PBIT). Table 4.12 indicates that the returns on working capital was 88.67% in 2004, it reduce to 41.41% in 2005, it reduced again to 20.8% in 2006, there was also a further reduction in 2007 to 18.78% hand finally reduced to 9.15% in 2008.

4.2.3 Efficiency Ratio AnalysisThe efficiency ratios indicate the efficient utilization and

management of a company’s recourses. The efficiency ratios to be computed include stock turnover, debtors’ collection period and creditor’s payment period.

49

Table 4.12: Stock Turnover and Days HeldYears 2004 2005 2006 2007 2008Stock Turnover (Times)

4 times

6 times

3 times

8 times

7 times

No. of Days stock is Held

89 days

65 days

138days

46days

50 days


Stock turnover measures the number of times stock is replenished in an accounting period, it can also be expressed as number of days stock is held. The higher the times stock is been turned over the lower the number of days it takes to hold stock. The no. of time stock was turnover in 2004 was 4 times which took 89 days to hold the stock, while in 2005 stock was turnover 6 time, taking 65 days, in 2006 stock turnover was only 3 times, representing the highest no. of days stock were held before sales in the years under review. 2007 indicates that stock were turned over 8 times which represent the lowest no. of days stock were held, while in 2008 stock were turned over 7 times. The above table shows that in 2006 the company did not sell much of its product, while in 2007 the company had its highest sell during the years under review.Table 4.13: Debtors Collection periodYears 2004 2005 2006 2007 2008Debtors Collection period

91 days

121days

68 days

28days

40days

Source: Computed from Table 4.6Debtors collection period indicate how efficient is the

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company at controlling its debtors. Table 4.13 shows that in 2004 was 91 days; in 2005 was 121 days. It was 68 days in 2006, 28 days in 2007, while in 2008 was 40 days. The analysis indicates that Cadbury Nigeria PLC has not really managed its debtor very well in 2004, 2005, 2006 and 2008. It was only in 2007 that the company had a good control over its debtors.Table 4.14: Creditors’ Payment periodYears 2004 2005 2006 2007 2008Creditors’ payment period

91 days

55 days

89 days

38 days

42days

Source: Computed from Table 4.7Creditor’s payment period measures how many credit

days is receive from suppliers. In 2004 there was a payment period of 91 days, 2005 had 55 days payment period, 89 days period in 2006, while in 2007 and 2008 were 38 days and 42 days payment period respectively. According to this result it can be said that the company does not manage its creditor effectively and this may impede further credit facilities from the creditors.4.3 DATA ANALYSIS (PRIMARY DATA)

The primary data analyzed under this chapter were draw mainly from the questionnaires distributed. The research questions are presented below starting from the bio-data of the respondent.4.3.1 Bio-data of the RespondentsTable 4.15: Gender

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Gender No. of Responses Percentage (%)MaleFemale

2313

6436

Total 36 100Source: Administered Questionnaire, 2010.

Out of the total number of the respondent, 64% of them are males, while 36% of them are females. These indicate that most of the respondents are males.

Table4.16: Current Level HeldRespondent Level No. of

RespondentPercentages (%)

Executive StaffSenior StaffJunior Staff

71811

195031


Table 4.16, shows that majority of the respondent are senior staffs, representing 50%, executive staffs represent 19%, while 31% of them are junior staffs. This signifies that at least more than half of the respondents are senior and executive staffs making their responses very pertinent. Although 31% of the respondent are junior staffs, their views are also important to this study since they are all staff of the company.

Table 4.17: Years of Experience in the companyYears of No. of Percentages (%)

52

Experience Respondent0 -1 year1 - 5 years5 - 15 years15 years - above

413910

11352628


Table 4.17 shows that 11% of the respondents have below one year experience, 35% have above one year but less than five years of experience, 26% have below fifteen years of experience and 28% of them have above fifteen years of experience. This signifies that most of the respondents have well developed mind and experiences necessary to provide an opinion on this study.

Table 4.18: Department or SectionDepartment No. of


Finance and AccountsMarketing DepartmentProduction Department

2448

671122


The above table indicates that majority of the respondents representing 67% are staffs working in finance

53

and account department, 11% work in the marketing department, while 22% work in production department. This shows that all the respondent are staffs working in the company and at least 24 of them are in the finance and accounting department who are directly involve in the management of working capital, thus marking their responses imperative.

Tabra4.19: Educational BackgroundDepartment No. of


ONDHNDB.Sc.M.Sc.P.HD.Others

11512620

3114331750


Table 4.19, shows that majority of the respondents are B. Sc. holders, representing 33%, OND holders followed by

54

31%, while holders of M. Sc. are 17% and 5% of them are P.HD holders. There was no respondent with other qualification not mentioned in the questionnaire.

The above tables in relation to the bio-data of the respondents signifies that all the respondents have well developed minds, experience and are matured enough to answer questions relating to the issue of working capital management.

4.3.2 Level of Working Capital Management The following questions were asked in respect to this

research question.Question 6: The importance of effective and efficient working capital management has been fully appreciated by your company.Table 4.20: Response to question 6Responses No. of


Strongly agree AgreeDisagreeStrongly disagree

161253

4533148


The above table shows that, 45% of the respondents strongly agree, and 33% agree that the company has fully appreciated the importance of effective working capital

55

management. However only 14% of the respondents disagree and 8% strongly disagree that the company has not really appreciates the importance of effective working capital management. The above table shows that management of Cadbury Nig. PLC takes into consideration the import of effective working capital management.

Question 7: Cadbury Nigeria PLC as a manufacturing company maintains an optimum level of working capital in her daily operations.

Table 4.21: Response to Question 7Responses No. of



712107

19332919


In table 4.21, respondents representing 19% strongly agree and 33% of them agreed that Cadbury Nigeria PLC

56

maintains an optimum level of working capital in her daily operations. While 48% of them representing 29% who disagree and 19% who strongly disagree that Cadbury Nig. PLC does not maintain an optimum level of working capital. In conclusion we can say that Cadbury Nig. PLC does not have an efficient level of working capital. However they try as much as possible to attain at least an average level of working capital in their daily operation.

Question 8: An optimum level of working capital impacts on the profitability of the company

Table 4.22: Response to Question 8Responses No. of



91782

2547226


Table 4.22, indicates that 72% of the respondents

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consisting of 25% who strongly agree and 47% who agreed that a good working capital management impacts positively on profitability. While only 28% of the respondents disagreed that working capital management do not any impact on profitability. It could be concluded that working capital, when managed properly helps in cost reduction and increase in profitability of the company along with other factors.

Question 9: Working Capital Management in an effective tool in evaluating the performance of your companyTable 4.23: Response to Question 9Responses No. of



516105

14442814


The above table shows that 59% of the respondents are of the opinion that working capital serve as an effective tool for measuring performance of a company. However 41% of them disagreed that working capital is not a good tool for measuring a company’s performance. The reason why there were many respondents that disagreed might be due to the fact that working capital management contributes just a little to progress of a company, other factors should be also

58

considered when measuring a company’s performance.

Question 10: Cadbury Nigeria PLC prefer short term financing to long term financing of current assetsTable 4.24: Response to Question 10Responses No. of



911106

25302817


Table 4.24, indicates that 25% of the respondents strongly agree that Cadbury Nigeria PLC prefer short term financing to long term financing of current assets, 31% of them agreed, while 29% of them are of the opinion that Cadbury Nigeria PLC prefer long term financing instead short term financing of current assets, while 17% of them strongly disagreed. Based on this responses, Cadbury Nigeria PLC prefer short term financing to long term financing of current assets since more than 50% of the respondents agreed.

4.3.3 Effect of Inefficient Working Capital Management

The following questions were asked in respect to this research question.

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Question 11: Cadbury Nigeria PLC encounters difficulties in the efficient and effective management of its working capital components.Table 4.25: Response to Question 11Responses No. of



139104

36252910


Table 4.25, indicates that 36% of the respondents strongly agree that Cadbury Nigeria PLC encounters difficulties in the efficient and effective management of its working capital components, while 25% of them agreed. 29% of the respondents disagreed and 10% of them strongly disagreed that Cadbury Nigeria PLC does not encounters difficulties in management of its working capital components. Question 12: How will you assess the effectiveness of the company’s working capital management towards the need for cost reduction and increase in profit

Table 4.26: Response to Question 12Responses No. of Percentages (%)

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RespondentVery GoodGoodFairPoor

213210

635590


Table 4.26, shows that 59% of the respondents were of the opinion that effective working capital management has been fair in contributing to the efficiency of the company, 35% said good while 6% said very good. Based on this, the company fairly manages its working capital. This contributed to the more reason why there has been little increase in the profit of the company as shown in financial statement.Question 13: Has your company ever experience lack of funds to meet its immediate obligation.Table 4.27: Response to Question 13Responses No. of


YesNo

2610

7228


From the data above, it is crystal clear that 72% of the respondents agree that the Organization has never experienced lack of funds to meet its immediate obligation, while 28% of the respondents were indifferent.

61

Question 14: What factor do you think militate against effective management of working capital components in your company?

Many responses were obtained from this question. However, most common among them are provided below:i. Official corruption and bribery.ii. Government policies like sudden ban on importation of

resources. iii. Interference in management decision by the board.iv. Imposition of taxes, inflationv. Quality and integrity of staffs. Question 15: What are the immediate impacts of inefficient management of working capital in your company?

The following were some of the immediate effect of inefficient management of working capital in Cadbury Nig. PLC mentioned by the respondents. i. Operating inefficiency occurs due to difficulties in meeting day to day commitment. ii. Inefficient utilization of assets due to lack of working funds, thus, lowering the rate of returns on investment.iii. Attractive credit opportunities may be loss due to paucity of working capital.iv. Excess of working capital may result in unnecessary

accumulation of inventories increasing the chances of inventory mishandling, waste and theft.

v. Excessive working capital may make management 62

complacent, leading to managerial inefficiencies.

4.4 HYPOTHESES TESTINGAs earlier stated, two set of hypotheses were

formulated. Hypothesis one will be tested using Correlation coefficient, while hypothesis two will be tested using Chi-square statistical technique. The hypotheses are formulated under the NULL (Ho) and ALTERNATIVE (H1) hypothesis so that the researcher will be objective and consistent in his decision on whether to accept or reject the hypothesis as the case may be.

4.4.1 Hypothesis One Hypothesis one will be tested using the correlation

coefficient statistical technique in other to measure the linear relationship between working capital and profitability. The hypothesis is restated as follows:Ho: Working Capital Management of Cadbury Nigeria PLC

does not enhance its profitability.H1: Working Capital Management of Cadbury Nigeria PLC

enhances its profitability.Table 4.28: Contingency Table for Hypothesis OneYear 2004 2005 2006 2007 2008

N’m N’m N’m N’m N’mPBIT (X) 3,891 3,937 (1,841) (2,461) (1,320)Working capital (y)

4,391 9,508 (8,853) (13,101)

(14,428)


63

In the table above, Profit Before Tax and Interest (PBIT) represent the dependent variable, while Working capital represent the independent variable. Using the correlation coefficient (r) in measuring the relationship between these variables, the result obtain is r= 0.7005. Decision: Since the calculated correlation coefficient (r) is greater than 0 but less than 1, then the null hypothesis is rejected while the alternative hypothesis is accepted which state that working capital management of Cadbury Nigeria PLC enhances its profitability.

4.4.2 Hypothesis Two To test the hypothesis which states that Cadbury

Nigeria PLC has an optimum level of Working Capital Management? We applied chi-square distribution statistics. The hypothesis is restated as follows:Ho: Cadbury Nigeria PLC does not have an optimum level of

Working Capital Management.H1: Cadbury Nigeria PLC has an optimum level of Working

Capital Management.

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Table 4.29: Contingency Table for Hypothesis TwoResponses

Question(6)

Question(7)

Question(8)

Question(9)

Total

Strongly Agree

16 7 9 5 37

Agree 12 12 17 16 57Disagree 5 10 8 10 33Strongly Disagree 3 7 2 5 17Total 36 36 36 36 144Source: Administered Questionnaire, 2010.

Degree of Freedom(4-1) (4-1) = 9 degree of freedomThe value of chi-square table X2t under 9 degree of freedom at 5% level of significance is 16.919Therefore:Value of chi-square calculated (X2c) = 14.3895Value of chi-square table (X2t) = 16.919 Decision:Since the value of (X2c)is less than the value of (X2t), the null hypothesis is accepted and the alternative hypothesis is rejected. Therefore, Cadbury Nigeria PLC does not have a good Working Capital Management.

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4.5 SUMMARY OF FINDINGSFrom the presentation and analysis of data, it is

necessary to give a clear and concise summary of findings base on the results obtain.

The component working capital analysis shows that stocks had the highest percentage of current asset, this indicate that the company may not be too liquid in the short run. Bank overdraft and short term borrowing on the other hand took the highest percentage of current liabilities in most of the years in review.

In determination the liquidity positions of Cadbury Nigeria PLC, it was found out that the current ratio and the acid test ratio of the company was not favorable and did not show good management. This was because the ratios over the years under reviews were below the industry average of 2 times the current liabilities. In fact, the current liabilities in some years exceed the current assets.

The efficiency ratios showed that lot of the company’s capital is tied down as a result of low stock turnover in most of the years in review. The debtor’s collection period shows an inefficient management of the company’s debtors, while there was inconsistency in the management of creditors.

The correlation coefficient calculated shows a positive relationship between working capital and profitability of the

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company, however the relationship was not very strong. It was also found out from the hypothesis tested using chi-square that Cadbury Nigeria PLC doesn’t have a good management of working capital.

CHAPTER FIVESUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 SUMMARYThis research work studied the effect of working capital

management on the profitability of manufacturing firms, in which Cadbury Nigeria PLC was the case study. The study is broken into five chapters as follows.

Chapter One covered the general introductory aspect of the study. The chapter also points out the objectives, scope and significance of the study. Research question and hypothesis were also formulated and stated in the chapter. Chapter Two dived into the work and postulations of scholars who have written tremendously on issues relating to working capital and profitability.

Chapter Three of this study covers the methodology adopted in the collection of data which include both the primary and the secondary data. The techniques to be employed in analyzing the data collected were also established in the chapter.

Chapter Four of the study is devoted to the presentation and analysis of data collected with a view to

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confirm or refute the research questions. The hypothesis is tested to arrive at valid conclusion. Various working capital ratios were also computed. Finally, Chapter Five is devoted to summary, conclusion and recommendations.

5.2 CONCLUSIONEffective and efficient management of working capital

is essential to the operation of any business entity be it manufacturing or retail business. It is essential because there is need for a business to be able to meet its short term obligation and other immediate need of the business. Working capital can also be used to access the performance or otherwise of a business in the short run.

The existence of working capital in Cadbury Nigeria PLC from the ratios computed and questionnaires analyzed we can draw the conclusion that the company has inadequate and poor quality working capital. This assertion is based on the fact that the ratios computed showed the weakness of the company's position and which shows that the company has been overtrading and over stocking of goods.

Finally it can be concluded that working capital if managed properly can contribute to cost reduction and increased profitability of a company.

5.3 RECOMMENDATIONSBased on the investigations conducted and the findings

of this study, the following recommendations are put forward

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by the researcher, for the management of Cadbury Nigeria PLC to improve on areas of weaknesses.

Firstly the company adopts physical stock counting. This shouldbe done annually, quarterly, monthly and weekly basis as the case may be. This will discourage and help to detect waste and pilferations of stock within the company. The stock record card figure should agree with actual quantity.

The company should reduce the period between the time cash is paid out for raw material and the time cash is recorded from sales of the company’s product. This will provide funds for regeneration and increasing working capital of the firm thereafter.

The company should pay more attention to its liquidity position and improve on it. This is because a company that has no favorable liquidity position may likely face insolvency problems.

In addition, the company should from time to time organize orientation courses and seminars on working capital management forits staff. This will help the company to be more aware of the importance of effective working capital management and to back on their industrial experience with modern and scientific ideas as they may be necessary, the poor working capital can also be remedied through provision of additional fund by the shareholders and loans from banks.

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Finally, Cadbury as international company should carry out more research to develop new product with the view of diversifying into new areas or lines of business.

REFERENCES

Aborede, R., (2006). Strategic Financial Management. Shomolu, Lagos: Master stroke Consulting Ltd.

Agbor, M. A., (2000). Fundamentals of Business Statistics. Lagos: Bendona and Associates Ltd.

Akinsulire, O., (2006). Financial Management. 4th ed. Lagos: Ceemol Nig. Ltd.

Braid, J. M., (1986). Inventory Management: The Student Accounts. A Journal of Association of Student Accountants, University of Science and Technology. Port-Harcourt. Vol. 6,

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p. 9.

Cadbury Nigeria PLC. (2004-2008). Annual Reports and Accounts.

Chetwynd, A., (2007). Working Capital Management. California: Santa Monica Publishers.

Elikwu, M., (2008). Research Project Made Easy: A Simplified Approach to Write & defend A Good Research Report. Lagos: Cin-Eight Publishers.

Ifeh, G.O., (2002). Working Capital: A tool for cost Reduction and Improvement in Profitability (A study of Nigeria Breweries PLC.). Enugu, Nigeria. Online, Assessed 8th

September 2010.

Madufor, S., (2006). Understanding Credit and Risk Management. Lagos: Standard 3ICE publishers.

Nwanna, O. I., (2005). Concepts in Financial Management Finance & Banking. Lagos: Gold trust ventures Ltd.

Olowe, A., (1997). Financial Management: Concepts, Analysis and Capital Investment. Brierly Jones Ltd.

Osibodu, C.O., (1990). A Typically x-ray of working capital Management: The Nigerian Accountant. Lagos: Vol. 23(2),

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p.25

Osisioma, (1990): Working Capital Management: Studies in Accountancy. Enugu: New Age Publishers. p. 288

Osuala, E. C., (2005). Introduction to Research Methodology in African. Onitsha: First Publishers Ltd.

Padachi, K., (2006). Trends in Working Capital Management. International Review of Business. Vol. 2

Pandey, M, I., (2006). Financial Management: 3rd ed. India. Vikies Publication.

Raheman, A. & Nasr, M., (2007). Working Capital Management And Profitability (Case Of Pakistani Firms). International Review of Business Research Papers. Vol. 3(1). pp.279 - 300.

www.wikipedia encyclopedia.org (2006). Working Capital

www.Planware.org (1999 – 2000). Managing Working Capital

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APPENDICESAPPENDIX 1

SAMPLE OF QUESTIONNAIRE

Department of Accounting,Faculty of management

Sciences, P.M.B. 117,Gwagwalada, Abuja.

Dear Sir/Madam,I am a final year student of University of Abuja, Faculty

of management sciences, Department of Accounting,

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conducting a research on the topic “the effect of working capital management on profitability” and your company was chosen as a case study. This is in partial fulfillment for the required for the award of B.Sc. Degree in Accounting.

I will be grateful if you can assist me in completing the questionnaire as sincere as possible. Please be assured that information provided will be treated in strict confidence and will be used for research purpose only.

Yours sincere,

Olusegun Segun.

THE QUESTIONSSECTION A: INFORMATION ABOUT THE RESPONDENTS1. Gender: Male ( ) Female ( )2. Current Level Held:

Executive Staff ( )Senior Staff ( )Junior Staff ( )

3. Years of Experience in the company:Less than one year ( )Over 1 year but less than 5 years ( )5 to 15 years ( )Over 15 years ( )

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4. Department or Section: Finance and Accounts ( )

Marketing Department ( )Production Department ( )

5. Educational Background?ONH ( ) HND ( )B. Sc. ( ) M.Sc. ( )P.HD. ( )Others, please specify………………….

SECTION B: LEVEL OF WORKING CAPITAL MANAGEMENT

6. The importance of effective and efficient working capital management has been fully appreciated by your company.

Strongly agree ( ) Agree ( )Disagree ( ) Strongly disagree ( )

7. Cadbury Nigeria PLC as s manufacturing company maintains an optimum level of working capital in her daily operations.


8. An optimum level of working capital impacts on the profitability of the company.

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9. Working Capital Management in an effective tool in evaluating the performance of your company.


10. Cadbury Nigeria PLC prefer short term financing to long term financing of current assets.


SECTION C: EFFECT OF INEFFICIENT WORKING CAPITAL MANAGEMENT

11. Cadbury Nigeria PLC encounters difficulties in the efficient and effective management of its working capital components.


12. How will you assess the effectiveness of the company’s working capital management towards the need for cost reduction and increase in profit.

Very Good ( ) Good ()

Poor ( ) Fair ( )13. Has your company ever experience lack of funds to meet its immediate obligation.

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Yes ( ) No ( )14. What factor do you think militate against effective management of working capital components in your company.i.

……………………………….......................................................ii.

……………………………….......................................................iii.

……………………………….......................................................iv.

……………………………….......................................................v.

……………………………….......................................................15. What are the immediate impact of inefficient management of working capital in your company?i.

……………………………….......................................................ii.

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……………………………….......................................................iii.

……………………………….......................................................iv.

……………………………….......................................................v.

………………………………....................................................... APPENDIX 2

TABLE FOR CALCULATING CORRELATION COEFFECIENT Years

X Y XY X2 Y2

N’m N’m N’m N’m N’m2004 3,891 4,391 17,073,70

815,139,881

19,254,544

2005 3,937 9,508 37,432,996

15,499,969

90,402,064

2006 (1,841)

(8,853) 16,298,373

3,389,281 78,375,609

2007 (2,461)

(13,101)

32,241,561

6,056,521 171,636,201

2008 (1,320)

(14,428)

19,044,960

1,742,400 20,867,184

Total 13,450

50,281 122,091,598

41,828,052

567,835,602

Where: x = Profit Before Interest and Tax: Y = Working Capital

r = ∑ xy - ∑ x( ∑ y) =0.7005 [n∑x2- (∑x)2] [n∑y2 - (∑y)2]

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APPENDIX 3

Calculation of Chi-square for Hypothesis TwoObserved Frequency (O)

Expected Frequency (E)

O - E (O - E)2 (O – E) 2 E

16 9.25 6.75 45.5625 4.92577 9.25 (2.25) 5.0625 0.54739 9.25 (0.25) 0.0625 0.00685 9.25 (4.25) 18.0625 1.952712 14.25 (2.25) 5.0625 0.355312 14.25 (2.25) 5.0625 0.355317 14.25 2.25 7.5625 0.5307

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16 14.25 1.75 3.0625 0.21495 8.25 (3.25) 10.5625 1.280310 8.25 1.75 3.0625 0.37128 8.25 (0.25) 0.0625 0.007810 8.25 1.75 3.0625 0.37123 4.25 (1.25) 1.5625 0.36747 4.25 2.75 7.5625 1.77942 4.25 (2.25) 5.0625 1.19135 4.25 0.75 0.5625 0.1323

Xc2 = 14.3895

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project

Documents

working capital policy

impact of working capital

capital managers

efficient management

appropriate management

long term capital market

current liabilities

financial factors