Accounting Department Research project Topic Chapter 1-5 titled – Impact of Working Capital Management Policy on Profitability.
1.1 BACKGROUND TO THE STUDY
Osuagwu (2012) noted in the colonial administration, self-employment was the economic and social way of life for most Nigerians. The businesses of the time were small and operated in the handicraft, manufacturing, constructional activities, including personal, commercial and professional services among others.
Before and after Nigeria’s independence, business climate was almost totally dominated by the Europeans multinational Companies like UAC, CFAO, PZ, Leventisetc. among others. The federal Government shared active participation in promoting small business enterprises in Nigeria by setting up in 1961 the first industrial Development Centre in Owerri. Various government policies and programmes have followed there after that showed the interest of federal government in promoting and supporting small and medium scale business, among which are:
- The Nigerian Indigenization Decree
- The First, Second, Third and Fourth National Development Plan which were entrepreneurship oriented bent.
- Establishment of Industrial Development Centers, Industrial Estates.
- Expansion of Small – Scale Industrial Credit Scheme and Provision of lending fund to Small Scale Industrials through NERFUND, NDE, NBCF etc.
- National Poverty Eradication Programme
- Research institutes among others.
He noted further that Nigerians are not new to entrepreneurship and small business enterprise. However, what may be new and not common the efficient and effective management of entrepreneurship and small scale business enterprises in Nigeria. According to Bello (2012) in Osuagwu 2012) there is the tendency for Nigeria small business enterprises to continue crying for government assistance instead of finding ways and means of helping themselves.
Also, Silver (2012) defined business as an organized effort by individuals or companies to produce goods, services or ideas, to exchange these goods, services, and ideas with the relevant market of interest and to get some rewards for this organized effort.
According to the Third Nigerian National Development Plan a manufacturing establishment that employs less than 10 people and whose investment on machinery and equipment do not exceed N600, 000 may be referred to as a small economics scale businessenterprises. However, in 1995 the Central Bank of Nigeria in its credit guidelines defined small business enterprise as any business organization with an annual turnover of less than N500, 000.
There are divergent of opinions as to what constitutes a small and medium scale business, though there is general agreement (in the literature) that a small or medium – sized enterprise is not a scaled – down version of large – scale company. Rather, it could be conveniently described in terms of shared features that such business possesses. According of Osuagwu, these include:
- Few numbers of employees
- Low amount of investment and annual business turnover
- Small in size within the industries
- Managers are also owners.
An additional requirement to be tagged a small business enterprises in Nigeria is that the number of employees is not greater than 50 in any situation and the financial capital outlay is not more than N150, 000.
Working capital and profitability of small and medium scale business
The trust of every business enterprise is to make adequate returns on capital invested. The returns generated (in terms of profit) will depend on the efficiency and effectiveness with which management makes use of its limited resources to achieve its set goals and objectives.
Henri Fayol discovered that major managerial activities of a business organization could be divided into six, which include:
- Technical (production)
- Commercial (buying, selling and exchange)
- Security (of property and person)
- Managerial (planning, control, command, co-ordination and organization)
The financial aspect and especially the working capital management of finance and its impact on profitability of small and medium scale enterprise will be considered in this study. Omotoso (2011) described working capital as a tool (distinct from fixed asset stated in monetary terms which is required for day – to – day operations of a company towards the achievement of its objectives). It is used to finance current assets such as stock and work – in – progress, debtors and prepayment, operational cash.
A company can only said to be operating efficiently when it has just right amount of working capital (optimum level of working capital). This will, however depends on the complexity and volatility of the operating cycle of a company, nature of business, manufacturing cycle, production policy, company’s, credit policy, price level charges, operating efficiency and so on.
Davies (2011) also noted that of the organization that falls in U.K 75 – 80 percent are profits, table at the time they do so. The problem states the fact that the relationship between cash – flow and profitability but also survival growth and expansion of the business.
The job of managing and or maintaining adequate amount of working capital could be very tasking. Omotoso (2011) gave the components of working capital management these include:
- Inventory control
- Debtors and Creditors management
- Management of cash and marketable securities
- Financial decision making
- Reporting for control
1.2 STATEMENT OF THE PROBLEM
The problem of the study is to analyze and rationalize the need for a methodical approach in the management of working capital and to compare this with the rule of thumb method whereby no scientific or systematical method has been applied. We shall look at this problem from the success or failure of most small and medium scale organization vis-à-vis how prudent their working capital management approach has been.