Working Capital Management and Corporate Performance in Quoted Manufacturing Firms in Nigeria

1.0 Introduction

1.1 Background of Study

Working capital management of a firm has been recognized as an important area in financial management. The main goal of working capital management is to teach and keep an optimized balance between each component of working capital (Gitmen, 2009). Traditional concept of working capital is the difference between current assets and current liabilities, which does not provide an accurate concept of corporate liquidity.

Every organization whether profit oriented or not and irrespective of size and nature of the business requires necessary amount of working capital. Working capital is the most crucial factor for maintaining liquidity, survival, solvency and profitability of business (Mukhopadhyay, 2004). All individual components of working capital include cash, marketable securities, account receivables and inventory management play a vital role in the performance of any firm.

In the management of working capital, the firm is faced with two key questions. First, given the level of sales and the relevant cost considerations, what are the optimal amounts of cash assets, account receivable, and inventories that a firm should choose to maintain? Second, given these optimal amounts, what is the most economical way to finance these working capital investments? To produce the best possible returns, firms should keep no unproductive assets and should finance with the cheapest available sources of funds.

Corporate performance is a composite assessment of how well an organization executes on its most important parameters, typically financial, market and shareholder performance. It is a subset of business analytics /business intelligence that is concerned with the health of the organization, which is traditionally measured in terms of financial performance. However, in recent years, the concept of corporate health has become broader. As noted by Gitman (2009), companies that effectively manage their working capital can reduce their reliance on external financing, thereby lowering the cost of capital and improving profitability (Gitman, 2009).

In the context of corporate performance, the link between working capital management and financial outcomes has been widely studied. Research suggests that firms with optimized working capital cycles tend to exhibit stronger financial performance metrics. For instance, Deloof (2003) found that shorter cash conversion cycles are associated with higher profitability among Belgian firms, emphasizing the importance of minimizing delays in accounts receivable and inventory turnover.

Liquidity and profitability are two important and major aspects of corporate business life (Dr K.S.Vataliya, 2009). The problem is that increasing profits at the cost of liquidity can bring serious problems to the firm. Therefore, there must be a trade-off between the liquidity and profitability of firms. One of these should not be at the cost of the other because both have their own importance. If firms do not care about profit, they cannot survive for a longer period. Also, if firms do not care about liquidity, they may face the problem of insolvency or bankruptcy. For these reasons, managers of firms should give utmost consideration for working capital management as it does ultimately affect the profitability of firms. As a result, companies can achieve maximum profitability and can maintain adequate liquidity with the help of efficient and effective management of working capital.

In addition, the effective working capital management is very important because it affects the performance and liquidity of the firms (Taleb et al., 2010). The main objective of working capital management is to reach optimal balance between working capital management components (Gill, 2011).

1.2 Statement of Problems

Investigation revealed that many organizations struggle to achieve an optimal balance between liquidity and profitability, which often hampers their overall performance. Poor management of working capital components, such as accounts receivable, inventory, and accounts payable, is one of the primary challenges faced by businesses, leading to liquidity shortages, operational inefficiencies, and financial instability.

Furthermore, the inability to maintain an efficient cash conversion cycle is a recurring problem for firms, particularly in highly competitive and resource-constrained environments. When working capital is not managed effectively, organizations experience delays in settling liabilities or meeting operational needs, ultimately affecting their profitability and market position. As Deloof (2003) explains, a lengthy cash conversion cycle tends to tie up resources unnecessarily, leaving businesses vulnerable to financial distress.

Egbide (2009) finds out that a large number of business failures in the past have been blamed on the inability of the financial manager to plan and control the working capital of their respective firms. These reported inadequacies among financial managers is still practiced today in many organizations in the form of high bad debts, high inventory cost etc, which in turn adversely affect their operating performance.

Hence, lack of proper research study and utilization of the working capital for the improvement of corporation in terms of performance in Nigeria has constituted the problem of limited awareness in relation to working capital to increase firms' performances. Hence, there is the need to study the effect of working capital to enhance the performance of corporations in Nigeria.

1.3 Aim and Objectives of Study

The aim of the study is to examine the impact of working capital management on the corporate performance of quoted manufacturing firms in Nigeria using case studies of Guinness, Dangote, Nestle, Cadbury, and Unilever.

The specific objectives include:

1. To identify the role of individual components of working capital, such as accounts receivable, inventory, and accounts payable, in enhancing corporate performance.
2. To investigate the challenges faced by organizations in managing working capital effectively and their implications for corporate growth.
3. To evaluate the effects of an optimized cash conversion cycle on a firm's financial health and sustainability.
4. To analyze the impact of working capital management on a firm's profitability and operational efficiency.
5. To recommend strategies for improving working capital management practices to achieve better corporate performance and competitiveness.

1.4 Research Questions

Based on the stated objectives, the following research questions are formulated to guide this study:

• How can effective working capital management practices be designed to align with corporate performance goals?
• What models can be created to optimize the cash conversion cycle, particularly regarding accounts receivable, inventory, and accounts payable?
• How does maintaining a balance between liquidity and profitability contribute to improved corporate performance?
• What are the key challenges organizations face in managing working capital, and what innovative solutions can address these challenges?
• What is the impact of efficient working capital management on the long-term sustainability and competitive advantage of a firm?

1.5 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: There is no significant relationship between working capital management and corporate performance, and working capital management does not affect profitability, liquidity, or long-term sustainability.
• H1: There is a significant relationship between working capital management and corporate performance, and working capital management does not affect profitability, liquidity, or long-term sustainability.

Hypothesis Two

• H0: Efficient working capital management negatively influences corporate performance by optimizing the cash conversion cycle, improving profitability, and enhancing long-term financial sustainability.
• H1: Efficient working capital management positively influences corporate performance by optimizing the cash conversion cycle, improving profitability, and enhancing long-term financial sustainability.

Hypothesis Three

• H0: There is no significant impact of efficient working capital management on the long-term sustainability and competitive advantage of a firm.
• H1: There is a significant impact of efficient working capital management on the long-term sustainability and competitive advantage of a firm.

1.6 Significance of Study

The outcome of this research will contribute to the development of best practices that firms can adopt to improve cash flow management and reduce operational inefficiencies. The study will benefit investors by providing information that will improve their understanding of how effective working capital management can influence a firm's long-term sustainability and return on investment, thus helping them make better investment choices.

Furthermore, academic researchers will find the study valuable as it will contribute to the growing body of knowledge on the link between working capital management and corporate performance, providing a foundation for future research in this area.

Finally, it is hoped that this work will proffer solutions to the problems associated with Working Capital Management in the Manufacturing industry of Nigeria as a policy tool for sustainability. It will equally be of great significance to those outside the Manufacturing industry, who are ignorant on the factors that lead to the smooth running of any business.

1.7 Scope of the Study

The research work will cover working capital management and how it affects the corporate performance of theses selected quoted companies, which are Guinness Plc, Dangote Plc, Nestle Plc, Cadbury Plc and Unilever Plc.

These five (5) companies were selected based on the availability of data, their performance in the Nigerian Manufacturing sector, and the popularity of these companies in the Nigerian Stock Exchange.

The data obtained from the five (5) selected quoted companies covers a period of seven (7) years from 2008 to 2015. The study used Return on Equity (ROE), Return on Asset (ROA) and Net Profit Margin (NPM)

1.8 Limitations of the Study

During the course of this study, there were some problems encountered which stood as limitations to the research work. Some of the limitations include:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. 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).
3. Initial Cooperation Delay from Respondents: A particular limitation of this work came as a result of the respondent refusal to offer their cooperation at the initial time they were contacted. This contributed in making the success of this research study difficult.

1.9 Definition of Terms

Working Capital Management:

Working capital management refers to the process of managing a company's short-term assets and liabilities to ensure it has sufficient liquidity to meet its operational needs. It involves effectively managing accounts receivable, accounts payable, and inventory to optimize cash flow and ensure the business operates smoothly (Gitman, 2009).

Liquidity:

Liquidity refers to a company's ability to meet its short-term financial obligations using its most liquid assets, such as cash or assets that can quickly be converted into cash. Managing liquidity is a key component of working capital management, as it ensures that a company can pay off its short-term debts without sacrificing operational efficiency (Almeida & Campello, 2007).