ACCOUNTING

THE PROBLEMS OF WORKING CAPITAL MANAGEMENT IN THE PRIVATE SECTOR

THE PROBLEMS OF WORKING CAPITAL MANAGEMENT IN THE PRIVATE SECTOR

CHAPTER ONE

INTRODUCTION

1.1      Background of the Study

Working Capital management is a major concern in the private sector and its deficiency has often been a trigger for private sector failure. Working Capital of a firm simply represents the operating liquidity available to run the firm. Management of working capital is an important component of corporate financial management because it directly affects the profitability and liquidity of all firms, irrespective of their sizes. Researchers have approached working capital management in numerous ways but there appear to be a consensus that working capital management has a significant impact on returns, profitability and firm value Deloof, (2003). Thus, efficient working capital management is known to have many favourable effects. it facilitates owner financing; it reduces working capital as a cause of failure among small businesses (Berryman, 1983); it ensures a sound liquidity for assurance of long-term economic growth and attainment of profit generating process (Wignaraja and O’Neil,1999); and it ensures acceptable relationship between the components of firms working capital for efficient mix which guarantee capital adequacy, (Osisioma, 1997). On the other hand, there is also a general agreement from literature that inefficient working capital management also induces small firms’ failures (Berryman, 1983) For all firms, in both developed and developing economies, one of the fundamental objectives of working capital management is to ensure that they have sufficient, regular and consistent cash flow to fund their activities. A Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.

Working capital management is part of the financing considerations that a finance manager of a corporation needs to determine, besides capital structure and capital budgeting (Ross, Westerfield and Jordan, 2010). In view that each company emphasized on maximizing profitability that can be generated from their business operation, many studies had been conducted on the effect of capital structure and working capital management in determining the profitability, which the results varies based on the study undertaken.   Meanwhile, in determining a firm’s profitability, the finance manager also needs to take into account the firm’s working capital management, which basically means managing the firm’s current assets and current liabilities at satisfactory level (Dong and Su, 2010; Gill, Biger and Mathur, 2010). Furthermore, the benefits of having an efficient working capital management are the firms able to meet its short term obligations and maintain adequate liquidity position in order to continue the operation of the firms (Eljelly, 2004).

1.2   Statement of the Problem

In Recent years, reports of the liquidation of private firms have been enormous. Between 1991 and 2011, over 55 Nigeria banks have been liquidated by the NDIC due to their protracted problem of distress. Adekanye (2002) and Adam (2003) revealed that nearly 100 out of the 128 banks in Nigeria failed and collapsed as result of inadequate capital base, mismanagement of funds, overtrading, and lack of sound regulation, control and unfair competition from the foreign banks. These problems have also been recorded in other private firms.  A critical look at the working capital management problems faced by these private has led to critical questions that are worth considering; how is Nigeria private sector strategising to improve upon their working capital management? What are the existing working capital items of Nigeria private firm? What has been the end-result of working capital management in Nigeria private firms? These stated problems together with the research questions below are what the researcher tries to encapsulate in the research topic with a view to providing their answers in the course of this research.

1.3   Objectives of the Study

In dealing with the above research questions, the study seeks to achieve the following objectives;

·  To examine the composition of working capital items in Nigeria private firms.

·  To examine the adequacy of working capital management in Nigeria private sector.

·  To ascertain if the components of working capital are well managed.

1.4   Research Questions

In view of the above stated problems, my research questions for this study are as follows:

·  What is the composition of working capital items in Nigeria private firms?

·  What have been the end-results of working capital management in Nigeria private firms?

·  Are these components of working capital well managed?

1.5   Significance of the Study

This study will be of immense benefit to other researchers who intend to know more on this topic and can also be used by non-researchers to build more on their work. This study contributes to knowledge and could serve as a bench mark or guide for other work or study.

1.6   Scope/Limitations of the Study

This study is on the problems of working capital management in the private sector. The study was conducted in selected private firms in Abuja.

Limitations of study

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.7   Definition of Terms

Management: consists of the interlocking functions of creating corporate policy and organizing, planning, controlling, and directing an organization’s resources in order to achieve the objectives of that policy.

Working capital: (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. It is a common measure of a company’s liquidity, efficiency, and overall health. Because it includes cash, inventory, accounts receivable, accounts payable, the portion of debt due within one year, and other short-term accounts

Private Sector: This is the part of a country’s economic system that is run by individuals and companies, rather than the government. Most private sector organizations are run with the intention of making profit.