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WORKING
CAPITAL ON
BUSINESS
PROFITABILITY
(A CASE STUDY OF HOZOPAC NIG. LIMITED. LAGOS. NIGERIA)
BY
……………………………………….
AKP/WRR/BMG/BUS/HND2007/…………
NOVEMBER 2009
2
CERTIFICATION
out .......................................................
Business Administration.
_______________ ________________
DATE
Project supervisor
__________________ ________________
DATE
Centre co-ordinator
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DEDICATION
ever enduring love, kindness, mercy and grace all through the
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ACKNOWLEDGEMENT
dear One and Only love that gives me Joy, Mrs Ejaita
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Almighty is that HE should bless you richly in JESUS
NAME.
ABSTRACT
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continue its operations and that it has sufficient cash flow to
operational expenses.
chapter five.
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CHAPTER ONE
INTRODUCION
Liabilities. There are two concepts of Working Capital which are Gross
investment in Current Assets. Current Assets are the assets, which can
negative.
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a) Way of optimizing investment in Current Assets.
Assets should be just adequate i.e., neither in excess nor deficit because
threaten the solvency of the firm because of its inability to meet its
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3. what is the nature of relationship between working capital and
capital employed/
The main objective of the study is to determine the effect of working capital
etc,
1. Liquidity
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2. Profitability
1) Liquidity
manner that it not only meets the needs of the forecasted sales but also
2) Profitability
Once we recognize the fact that the total amount of financial resources
the smaller will be the amount available for investment in other profitable
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avenues at hand with the company. A conservative approach in respect
Current Assets will be more for a given level of Sales forecast under the
ratio of Net Sales to Current Assets) will be less than what they would be
Sales Revenue, operating Profit before Interest and Tax and Net
4. Auditors
5. Accountants
6. Financial analyst
they do not fully endorse, There was the limitation of the rigidity of
initially not on their seats. There was the limitation that the
researcher and the field data collectors were not policemen and so
they could not force some of the respondents if they refuse to give
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answers. There was also the limitation of the scarcity of time and
Material Procurement
for the job. The researcher made series of consultations and visit to
Time Constraints
project.
Financial Constraints
obtainable here but due to lack of money to visit some of the firms
place of resident.
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1.6 HYPOTHESES
affairs or phenomenon.
HYPOTHESIS THUS:
purpose of the study. For the efficiency of the study, the hypothesis
is as follows:
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ALTERNATIVE HYPOTHESIS
goodwill.
1. Introduction
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CHAPTER TWO
raised as and when one likes it, it is, therefore, desirable that
the undertaking does not keep sufficient cash in hand, it shall not
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management comes, i.e., how much cash should be set aside for
working.
concern i.e., fixed assets and current assets. Both types of assets
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inventory. Unlike the management of fixed assets which may be
order.
of the firm and the current assets. An increase in the sale of the
efficiently.
(2) More than half of the total capital of the firm is generally
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(4) Working capital needs are more often financed through outside
Working capital means the funds (i.e.; capital) available and used
existence.
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inventories and debtors) and the short term financing, such that
•Cash management. Identify the cash balance which allows for the
costs.
credit terms which will attract customers, such that any impact on
cash flows and the cash conversion cycle will be offset by increased
"factoring".
as product mix, supply chain design and business model (for example
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2.3 DECISION CRITERIA
profitability.
- the net number of days from the outlay of cash for raw material to
number effectively corresponds to the time that the firm's cash is tied
Return on equity (ROE) shows this result for the firm's shareholders.
Firm value is enhanced when, and if, the return on capital, which
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measures are therefore useful as a management tool, in that they link
eventually run out of cash and expire. Click here for more
cashflow.
The faster a business expands, the more cash it will need for
profits and reduce risks. Bear in mind that the cost of providing
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There are two elements in the business cycle that absorb cash -
you can get money to move faster around the cycle (e.g. collect
• Long-term loans
If you have insufficient working capital and try to increase sales, you
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• Frequent short-term emergency requests to the bank (to help pay
bad debts.
small businesses who can least afford it. If you don't manage
1. Have the right mental attitude to the control of credit and make
ones.
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5. Check out each customer thoroughly before you offer credit. Use
7. Continuously review these limits when you suspect tough times are
Recognize that the longer someone owes you, the greater the chance
you will never get paid. If the average age of your debtors is getting
longer, or is already very long, you may need to look for the following
possible defects:
• -customer dissatisfaction.
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Debtors due over 90 days (unless within agreed credit terms) should
• longer credit terms taken with approval, particularly for smaller orders
same goods. New customers who are reluctant to give credit references
The act of collecting money is one which most people dislike for
many reasons and therefore put on the long finger because they
does not pay is not a customer. Here are a few ideas that may help
• Don't feel guilty asking for money.... its yours and you are entitled
to it.
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• Make that call now. And keep asking until you get some
satisfaction.
• In difficult circumstances, take what you can now and agree terms
• When asking for your money, be hard on the issue - but soft on the
person. Don't give the debtor any excuses for not paying.
get even.
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Do you have alternative sources of supply ? If not, get quotes from
major suppliers and shop around for the best discounts, credit
5. Inventory Management
The key is to know how quickly your overall stock is moving or,
put another way, how long each item of stock sit on shelves before
vegetable shop might turn over its entire stock every few days
hold stock for a very short time, they are able to conserve
The key issue for a business is to identify the fast and slow stock
include:
• Can you remove slow movers from your product range without
Remember that stock sitting on shelves for long periods of time ties
up money which is not working for you. For better stock control, try
the following:
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•Review the effectiveness of existing purchasing and inventory
systems.
effective stock
management.
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Obsolete stock, slow
Effective debtor
management will
suffer.
Current Total Current =x Current Assets are
business. Current
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Less than 1 times e.g.
pressure to generate
oncoming demands.
(Total
Similar to the Current
Current
Ratio but takes account
Assets - =x
Quick Ratio of the fact that it may
Inventory)/ times
take time to convert
Total Current
inventory into cash.
Liabilities
(Inventory + A high percentage means
Working
Receivables - As % that working capital
Capital
Payables)/ Sales needs are high relative
Ratio
Sales to your sales.
customers.
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Once ratios have been established for your business, it is important
to track them over time and to compare them with ratios for other
short when your company could least afford it. To prevent this crisis-
your annual sales are N365,000. Dividing this figure by the number of
days in the year gives average daily sales of N1,000. If your accounts
days.
of inventory on hand.
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Divide this by 365 days, and you have purchases of approximately
$500 per day. If your accounts payable are $16,000, you have an
inventory days (in this case, 105 days) and subtract from this the
"Assume your annual cash needs (sales minus profits minus such
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The cash-flow forecast should be comprehensive, and it should
cash inflows come shortly after customers are billed. Large cash
taxes.
into sharper focus the company's cash needs, taking some of the
bankers that you not only need loans but will be in position to
repay them."
CHAPTER THREE
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The research method selected for the study is a combination of a
be manipulated;
The subjects give the data the natural settings of their workplaces;
and
(vi) The aim of the research may span from the exploration
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due to the utilization of big sample sizes, which results in generally
The survey research method also has the merit that data collection
(stone, 1995).
3.2 SAMPLING
samples drawn from it. The population in this study is from the
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select the sample of 100 respondents from each group of the
The list of all senior and junior staff of the firm is from the
cover the numbers and one of the pieces of paper was selected at a
3.3 POPULATION
The population, in this study is the totality of the senior and junior
The sample size is 200 and this number of respondents was chosen
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We should note that above is only possible if the probability sample
Questionnaire
standard set.
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The questionnaire also has some demerits. It has noted that for
researcher is not a policeman that can compel answers. That is, the
1996).
section and the section on the data on the actual subject matter of
the work. The questionnaire was undisguised in the sense that the
purpose of the data collection which was to collect primary data for
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writing up the researcher’s HND project was made know to the 200
respondents to tick.
The structured questionnaire has the merit that it yields data that
Interview
means of the personal interview. The method has the merit that it
telephone methods. It also has the merit that it gives a very high
completion and response rates. It has the merit that the interview
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has a bigger sensitively misunderstandings by the respondents and
the merit that it is a very feasible method (Selltiz et al, 1976). The
questionnaire.
Observations
observation was also carried out. This was to enable the researcher
these people.
The researcher and three other field data collectors did the
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3.6 DESCRIPTION OF DATA PRESENTATION AND ANALYSIS
TOOLS
The data presentation tools are simple bar charts, histograms, and
(c) Caption
the title.
Anyiwe (1994) has observed that a table has the following merits
information;
formation:
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The data is to be analysed by means of percentage, cross
It was the initial thought of the researcher that the exercise was
easy but the contrary was the case. As a student, several academic
This was my situation. Although the time expended was too small
made.
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CHAPTER FOUR
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4.1 INTRODUCTION
chapter includes:
Data Presentation,
Percentage analysis
Cross-tabulated analysis
Hypothesis testing
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4.2 DATA PRESENTATION
TABLE1
THE SUMMARY OF THE PERSONAL DATA
OF THE RESPONDENTS
1 SEX FREQUENCY
Male 150
Female 50
Total 200
Angles
2 Marital Status suspended
Married 130 in degree
Single 70
Total 200
3 AGE
21-30 years 90
31-40 years 90
41-50 years 10
51-60 years 10
Total 200
4 HIGHER
EDUCATIONAL
QUALIFICATION
DIPLOMA 10 18
OND 30 54
HND 80 144
FIRST DEGREE 20 36
SECOND DEGREE 40 32
NIM 20 36
TOTAL 200 360
the ages of the 200 respondents they are 21-30 years, 31-
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200 respondents they are diploma, OND, HND, First
Figure 4.1 below shows the simple bar chart of the data on
140-
120-
100-
80
60 --
40 -
20
-
0 -
MAIL FEMALE
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Source: from data in table 1 (generated from SPSS)
them.
Figure 4.2 below shows the simple bar chart of the data
140 -
120 -
100 -
80 -
60 -
40 -
20 -
0 -
MARRIED SINGLE
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Status frequency Percentage Valid Cumulative
Percent Percent
MARRIED 130 65.0 65.0 65.0
SINGLE 70 35.0 35.0 100.0
Total 200 100.0 100.0
frequency of 70 of them.
N = 200.00
1.0 2.0 3.0 4.0
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TABLE 4. AGES OF THE RESPONDENTS
Figure 4.4 below shows the pie chart of the data on the
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FIG.4.4 THE PIE CHART OF THE DATA ON THE HIGHEST
EDUCATIONAL QUALIFICATIONS OF THE 200
RESPONDENTS
OND DIPLOMA
FIRST DEGREE
10%
30% OND
SECOND DEGREE 20%
40%
HND
80%
SECOND DEGREE 20%
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SOURCE: from the data in table 1.
equal to 180, 540, 1440, 360, 720 and 360 and respectively
200 respondents
NO
YES NO DON’T ANSWER Total
10
KNOW 2
19
2 91
DIPLOMA 6 2 2
OND 19 7 19
HND
FIRST
14 31 9
40
DEGREE - 10 39 21
SECOND 40 18 200
DEGREE 21
NIM
Total 100 43 39
39 39
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The above table shows that the total of 100 respondents
TABLE 7. Cross-tabulation 2
OND 19 19
HND 14 30 47 91
FIRST
DEGREE 10 9 19
SECOND
DEGREE 40 40
NIM 21 21
Total 104 40 47 9 200
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hypothesis, which may or may not be true. The
symbol H1.
CHI-SQUARE TEST
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theory and observation can be attributed to chance or
c =∑ (O-E)2/E
Where,O=Observed frequency
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Chi-Square Test (1)
Residuals
values.
TEST STATISTICS
WORKING
WORKING CAPITAL HELPS CAPITAL CREATE
AN
THE BUSINESS CONCERN IN ENVIRONMENT
OF
MAINTAINING THE SECURITY,CONFI
DENCE AND
OVERALL
GOODWILL EFFICIENCY IN A
BUSINESS
61
Chi-Square 73.880 94.120
df 3 3
note: df = degree of freedom
Level of significance……….0.05
Critical value………………………43.0
Calculated value……………………73.880
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CHAPTER FIVE
5.0 INTRODUCTION
5.1 FINDINGS
and cash.
5.2 SUMMARY
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1. Gross Working Capital: Gross Working Capital refers
5.3 CONCLUSION
working capital means the firm has idle funds which earn
the firm does not have sufficient funds for running its
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operations. It will be interesting to understand the
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It is in this respect that this study finds it worthwhile to address the
following questions using time series data for a 31-year period, 1970-
2000: (a) what is the nature of relationship between poverty,
unemployment and growth in Nigeria? (b) what steps should be taken to
ensure that growth is such that brings about decrease in unemployment
and poverty in Nigeria?
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68