AN EVALUATION OF WORKING CAPITAL POLICIES AND THEIR IMPACT ON PROFITABILITY OF FIRMS
AN EVALUATION OF WORKING CAPITAL POLICIES AND THEIR IMPACT ON PROFITABILITY OF FIRMS
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Date
2006-08
Authors
SURAJO, SANUSI,
MUHAMMAD
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Abstract
ABSTRACT
The management of current assets and short term funds is as important as that of
fixed assets and long term funds. Therefore, the need for effective working capital
management cannot be overemphasized in manufacturing companies for realization
of their objectives. The effectiveness of that working capital management depends
largely on proper financing of working capital. It was therefore considered
appropriate in this research to evaluate the impact of working capital financing
policies on profitability of manufacturing firms in Nigeria. The main objective of the
study was to come up with evidences that establish the relationship between working
capital policy and profitability of a firm, and identify the working capital policy that
contributes most to the profitability of a firm under different conditions. To achieve
this objective, six (6) manufacturing companies that are quoted in the Nigerian Stock
Exchange were selected as a case study, and a sample of one hundred and fifty (150)
respondents who were employees of the companies was used in the study. Thus, data
from primary sources were analyzed using simple descriptive research design. In
addition, three (3) hypotheses were formulated and tested for significance using the ttest
statistic technique. The secondary data were collected from the published
financial statements of the companies under study and analyzed using correlation
coefficient and financial ratios for the period 1999 to 2003. The research revealed that
companies using different working capital policies had different profitability, which
concluded that there is significant relationship between working capital policy and
profitability of manufacturing company, and such relationship depends on the
operating performance of the firm. It was also discovered that manufacturing
companies that adopt conservative working capital policy are more profitable
especially when the demand for company’s product is high. Finally, the researcher
recommended that manufacturing companies should employ qualified financial
managers so as to effectively control cost of production and balance the trade off
between cost of sales and quality of products manufactured in order to boost sales. It
was also recommended that factors affecting working capital needs should be
critically studied, so that investment in working capital would be appropriate to avoid
high risk of uncertainties.
Description
DEPARTMENT OF ACCOUNTING
FACULTY OF ADMINISTRATION
AHMADU BELLO UNIVERSITY
ZARIA.
Keywords
EVALUATION,, WORKING,, CAPITAL,, POLICIES,, IMPACT,, PROFITABILITY, FIRMS