THE EFFECTIVENESS OF WORKING CAPITAL MANAGEMENT AND IT’S EFFECT ON THE PROFITABILITY OF SMALL SCALE INDUSTRIES. (A CASE STUDY OF PECO FEEDS NIG. LTD)

TABLE OF CONTENTS

Title page………………………………………………………….i

Approval page…………………………………………………….ii

Dedication…………………………………………………………iii

Acknowledgement……………………………………………….iv

Table of content………………………………………………….vi

Abstract…………………………………………………………….x

CHAPTER ONE……………………………………………………1

• Introduction………………………………………………….1
  • Background of the study…………………………………..3
  • Statement of problem……………………………………….5
  • Objectives of study…………………………………………5
  • Research Questions…………………………………………6
  • Significance of the study…………………………………..7
  • Scope of study………………………………………………7
  • Definition of terms…………………………………………8

CHAPTER TWO…………………………………………………..10

• REVIEW OF RELATED LITERATURE…………………10
  • Brief Definition……………………………………………..10
  • Model and theories relevant to the research question……………………………………………………..16
  • Current literatures based on the variables of the research questions………………………………………..23
  • Summary of literature Review…………………………28

CHAPTER THREE………………………………………………29

• RESEARCH METHODOLOGY………………………….29
  • Research Design…………………………………………..29
  • Area of study……………………………………………….30
  • Population of study……………………………………….30
  • Sampling Technique………………………………………30
  • Sources of Data……………………………………………32
  • Instrument for data collection………………………32
  • Validity and reliability of instrument……………..33
  • Distribution and retrieval of the instrument…….33
  • Method of data Analysis………………………………33

CHAPTER FOUR……………………………………………….35

• DATA PRESENTATION AND ANALYSIS……………35
  • Data presentation and interpretation according to research question……………………………………….35
  • Findings……………………………………………………40
  • Discussion on the findings……………………………42

CHAPTER FIVE………………………………………………….43

• SUMMARY, CONCLUSION AND RECOMMENDATIONS..43
  • Summary of findings…………………………………….43
  • Conclusion…………………………………………………44
  • Recommendations……………………………………….46
  • Limitations of the study………………………………..47
  • Suggestions for further research…………………….48

References……………………………………………………….49

Appendix A………………………………………………………50

Appendix B……………………………………………………….51

ABSTRACT

The title of this project is the effectiveness of working capital management and its effect on the profitability of small scale industries (A case study of PECO FEEDS (NIG) LTD).The objectives of this study is to determine one existing working capital policies items of the balance sheet namely inventory, receivables, cash and trade creditors, to access adequate effective working policies, to determine the impact of the policies on the profitability of the company and make necessary recommendations and also to determine the credit facilities to be granted in small scale industries. The researcher collected data through primary and secondary source. Primary data was collected from direct observation, interview and questionnaire while the secondary source data was collected from journal, internet, and magazines. The researcher also used questionnaire from respondent. The findings of this study was that the level of management in the organization is accurate and effective in PECO FEEDS (NIG) LTD and also it shows that PECO FEEDS (NIG) LTD keeps the business going profitably on a day-to-day basis to inventors and owners of small scale enterprises who have not adopted policies on the working capital management. Based on the discussion and conclusion so far, the researchers therefore offer the following recommendations: Inventory management and control should be given adequate consideration. Inventory levels should be established using appropriate techniques. The existence of well formalized working capital policies should be given adequate consideration and also the increase in the average payment period should be investigated to ensure that suppliers resentment exist observed increases in the operating cycle.

CHAPTER ONE

• INTRODUCTION:

THE CONCEPT OF WORKING CAPITAL:

The term working capital has been variously defined by many, authors and professionals.

According to Alex U.Mbachu, he viewed working capital thus: working capital is used to denote the excess of current liabilities. The excess is sometimes referred to as net working capital because men consider current assets as working capital. It can also be referred to as that part of a company’s assets which are convertible into other assets. Thus, working capitals are convertible into other assets. It represents the money required for the purchases of raw materials, payments of salaries and ways and expenses for financing the interval between the date of supply of goods and data of receipt of payment for goods.

In another view, Western and Brigham’s referred to working capital as a firm investment in short term assets cash, short term securities trade debtors and stocks. Net working capital is defined as current assets minus current liabilities. He also referred to working capital management as all aspects of the administration of both Current assets and current liabilities. According to D.S Inyang the executive Director of Allied bank of Nigerian Ltd, working capital represents current assets minus current liabilities at a given point in times.

However, any transactions that increase working capital is a source of working capital while any transaction that decreases working capital is a use of working capital. though the accountant and financiers referred to working capitals funds, they went further to differentiate this from its ordinary usage as cash, Thus: any transaction that increase working capital is a sources of working capital which to my view could be current assets while any transaction that decrease working capital could also be current liabilities. Therefore, current assets minus current liabilities are working capital which refers to “FUNDS”.

Working capital is one of the most widely used measures of short- term liquidity. Working capital has two extreme points vis, working capital deficiency exists when current liabilities exceed current assets. Excessive working capital exists where a company has two much liquid assets (cash) than it readily needs. Working capital deficiency means enable of weak liquidity. This poses a threat to the solvency of the company and makes it unshaped and unsound.

• BACKGROUND OF THE SYUDY

The PECO FEEDS (NIG) LTD is a case study of my project. It is located along airport road Emene in Enugu State and was incorporated in 1982 as a privately owned company. PECO stared its test production June, 1982 and went into complete production before the end of July the same. The company was owned by two individuals who are also the directors and Nigerians. The company was established to manufacture animal feeds categorized into poultry and other domestic feeds such as layers mash, growers mash and chic mash-these feeds are used in feeding different types of animals such as pigs, cows and poultry birds etc.

The company’s production has not reached its full capacity of 10 metric tones per hour. This is evidenced by the expansion work going on presently in the factory. The raw materials used by the company are making obtained locally while about 5% are obtained through importation. Presently, the company occupies a larger share of the market than other animal feed industries in Enugu. The company has #1,000,000 as its initial capital which was divided into #500,000 between the two directors.

However, since then the capital has neither been increased nor decreased accordable to information given by the management. In organizational structure, the company has a staff strength of about 113 persons and is made up of departments which include the production, the accounts, the marketing, administrative and maintenances.

• STATEMENT OF THE PROBLEM

For the past years, the Peco Feeds (Nig) ltd, have constantly been exposed series of problems. Such as Inventory determination and high incidence of bad debts.

Lack of ineffective working policies.

Poor management of the working capital.

Lack of raw materials for the production.

1.3   OBJECTIVE OF THE STUDY

In light of the above problems, objectives of the following tasks are set for achievement in order to solve the problems.

1. To determine the existing working capital policies items of the balance sheet namely inventory, receivables, cash and trade creditors.
2. To access the adequate effective working polices.
3. To access the adequate of polices, for effective working capital management
4. To determine the impact of the policies on the profitability of the company and make necessary recommendations.

1.4      RESEARCH QUESTIONS

1. What roles canPeco Feed (Nig) Ltd has to play to avoid inventory determining and high incidence of bad debts?
2. Does peco feed (Nig) Ltd have formalized effective working policies?
3. In the absence of any formalized working capital polices, what can the company do to enhance effective working capital management?
4. What impacts have these policies on the profitability of the company?

1.5 SIGNIFICANCE OF THE STUDY

Whereas working capital policy is related to setting long run targets, working capital management deals with the implementation of policy. From the foregoing, this work will be useful to investors and creditor and others who may have dealing with PECO feeds (Nig) Ltd, and also contribute to the management of the company. It will also help the company to make some adjustment where necessary.

Finally, this work is intended to be or a general benefit to all investors and owners of small scale enterprises who have not adopted policies on working capital management.

1.6 SCOPE OF THE STUDY

This project, which is the effectiveness of working capital management, its effect on the profitability of small industries. A case study of Peco feeds (Nig) Lid is intended to cover the working capital management in small industries in Enugu.

However, due to some certain constraints, this has focused specifically on the working capital of PECO FEEDS (NIG) LIMITED. Mostly, there is no laid down principles nor standard bet through which working capital can be determined.

1.7 DEFINITION OF TERMS:

1. CAPITAL: This is the wealth owned by an individual or business organization in the form of money or goods which is to be used for the credition of additional wealth.
2. CURRENT LIABILITIES: They are short-termcredits owned by the company to other individual or companies which are payable within the accounting year or operating cycle.
3. CURRENT ASSETS: Current assets are those assets which can be converted into cash within an accounting year of within operating cycle
4. OPERATING CYCLE: This is the period involved from the time cash is invested in inventory until the time cash is recovered from the sale of the goods.
5. FIXED ASSETS: These are assets which are not readily convertible into cash and acquired for a long term usage in the firm. E.g. building plant etc.
6. INVENTORY: They are stock or raw materials finished in manufacturing operations.
7. CREDIT POLICY: This is how a firm plans to give out its credits and collection of debts owned to it by its creditors.

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