AN EXAMINATION ON THE MANAGEMENT OF WORKING CAPITAL (A CASE STUDY OF NIGERIA BAG MANUFACTURING COMPANY)
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AN EXAMINATION ON THE
MANAGEMENT OF WORKING CAPITAL (A CASE STUDY OF NIGERIA BAG MANUFACTURING COMPANY)
ABSTRACT
This study examines the Management of Working Capital with
special reference to Nigeria Bag Manufacturing Company.
This study employs survey research design. Analytically, the
research adopted descriptive statistics to examine the impact of working
capital in manufacturing organisations in Nigeria.
Data were basically sourced from primary method through means
of a well structured questionnaire. Twenty Five (25) respondents were sampled
from the population based on simple random sampling technique.
Four hypotheses were formulated and tested with the used of
Chi-Square Statistical Technique. The analysis resulted into rejecting the four
null hypotheses and concluding that; The working capital requirement of a
business venture is dependent on the level of the business that has been
established; Excessive working can increase production cost; The longer the
working capitals cycle of an organization, the greater the investment in
working capital; and there is no industry norm or minimum agreed level of
investment in working capital.
The study proffered valuable recommendations as business
organization should manager its working capital efficiently, in such a way as
to avoid the ills of over capitalization and under capitalization.
TABLE OF CONTENT
Chapter one
1.0 General
background of the study
1.1 Background of
the company, Nigeria bag manufacturing
company
(BAGCO).
1.1.1 Historical
background
1.1.2 Nature of
business activities
1.1.3 Organization
structure
1.2 Statement of
problem
1.3 Significance
of the study
1.4 Objectives
of the study
1.5 Statement of
research questions
1.6 Research
hypotheses
1.7 Scope and
Limitation of the study
1.8 Definitions
of technical terms
1.9 Research
methodology
CHAPTER TWO
2.0 Literature
review
2.1 Management of inventories
2.2 Management of
cash
2.2.1 Cash planning
2.2.2 Managing the back flows
2.2.3 Optimal cash level
2.2.4 Investing surplus cash
2.2.5 Cash operating circle
2.3 Management of receivable
2.4 Management of current liabilities
2.5 Benefit of management of working capital
2.6 Working capital ratio
2.7 Working capital circle
2.8 Overtrading and working capital
2.9 Under trading and working capital
CHAPTER THREE
3.0 Research methodology
3.1 Restatement of research hypotheses
3.2 Population of study
3.3 Sampling design and procedure
3.4 Source of data
3.4.1 Primary sources of data
3.4.2 Secondary sources of data
3.5 Data collection instrument and administration
3.5.1 Questionnaire
3.6 Procedure for data analysis
3.6.1 Chi-square (X2) analysis
3.6.2 Percentage analysis
3.6.3 Level of significance
CHAPTER FOUR
4.0 Data presentation, analysis and interpretation
4.1 Test of hypothesis
4.2 Conclusion
Chapter Five: Summary of Finding, Recommendation and
Conclusion
5.0 Summary of findings
5.1 Recommendations
5.2 Conclusion
Bibliography
Appendix
Questionnaire
CHAPTER ONE
INTRODUCTION
1.0 GENERAL
BACKGROUND OF THE STUDY
The enactment of the Nigeria Enterprise, promotion Decree of
1972, otherwise known as Indigenization Decree, made many businesses which were
higher in the hands of foreign business men to pass into the hands of
Nigerians. Perhaps by more co-incidences the economy became over liquid. The
result at the excess liquidity was inflation.
To succeed in this new challenge passed by the said
Indigenization Decree, Nigerian entrepreneurs and business concerns need at
least a fair comprehension of essential aspects of financial management and
more specifically, working capital management.
Generally, it is believed that the presumed objective at
financial management especially in private organizations is the maximization of
the value of the firm. Thus, wealth maximization of the present value of the
future streams of cash inflows of the shareholders which are a derivative at
the profitability of a firm. (Brokington, 1983).
Although profitability may be considered the objectives at a
business, nevertheless, the mismanagement of work capital can effectively bring
to a half, or to its ultimate downfall, what might otherwise be a successful
and profitable organization.
Therefore, according to Howard (1982) working capital is
defined as ''the asset held for current use within a business less the amount
due to those who await settlement in the short-term in whatever form". In
the same vein,
Olowe (1997) views working capital as "the capital
available for running the day to day operation of and organization. It is
defmed as current Assets less Current liabilities".
Current Assets are the circulating assets of the business;
these are the assets that are not permanent in nature. They include: Cash at
hand and bank; Short-term investments such as treasury bills; Stock of raw
materials, work-in-progress and finished goods; Debtors, Accrued income etc.
Current liabilities on the other hand are debts of the business that have to be
settled within the following twelve months. They include; Creditors; Current
taxation, Bank overdraft etc. A current liability for a sizeable part of the
business sources at finance and it is the cheapest form at business finance
(Olowe, 1997).
Pandey (1986) views working capital form two perspectives.
These are gross working capital and net working capital. Gross working capital
means "firms investment in current assets. Net working capital on the
other hand is "current asset less current liabilities".
The importance of gross working capital is indicated by
optimum investment in current assets. Here, the investment neither is in
excess; resulting into tying down the capital of the business, nor investment
inadequate; which will make the business insolvent. On the other hand, net
working capital implies, that the current liabilities.
This is necessary in order to protect the interest of
creditors. For this to be effective, current assets must be well above currents
liabilities. Here, current ratio of 2.1 may be considered necessary (Pandey,
1986).
In view of the forgoing, working capital management is that
managerial effort or approach which seeks to ensure that correct amount of
investment are made by firms in working capital, adequate enough to cope with
the business level being operated by that firms.
Working capital management therefore reverses to the
management at all aspect of current assets and current liabilities. Hence, the
managing working capital, it is essential to known the amount to be invested in
current assets and the appropriate sources from which the finance will come.
Evidently, two extremes are easily notice at regards investment
in working capital by firms, that is
· Having
excessive working capital and;
· Having in
adequate working capital
However, the objective of a finance manager as regards the
management of working capital is the strike a balance: between these two
extremes because excessive working capital is expensive and inadequate working
capital very dangerous. These extremes can be likened to liquidity and
profitability on which compromise is being achieved with managerial effort on
working capital (Brokington, 1983).
In essence, working capital management hopes to ensure the
most efficient use to resources open to the firms, and it also involves making
sure that the commitment to working capital is as low as possible. However,
this is determined to a larger extent by the type of industrial involved, but
there may be other policy considerations which may influence the level. (Pandey
1985).
1.1 BACKGROUND OF THE COMPANY NIGERIA BAG MANUFACTURING COMP
ANY-(BAGCO)
1.1.1 Historical Background
The company, Nigeria Bag manufacturing Company Limited
(Bagco) was incorporated in 1964 as a wholly owned subsidiary
of flour mills of Nigeria plc. Almost immediate bagco’s pioneering spirit was
established in 1972 new polypropylene bag manufacturing equipment was installed
in the premises at Eric Moore Road, Surulere Lagos. As the first company in
Nigeria to embrace this new technology Bagco enjoyed rapid expansion such that
by 1978 the complete production range had been transferred to the new
polypropylene technology.
Over the next decade bagco grew steadily as the production
base was increased to meet the increasing demands of the market in terms of
volume and product range. The next step for Bagco was to incorporated Northern
Bag manufacturing Company Limited (Bagco North) in 1990 thereby enabling Bagco
to become a truly pan Nigeria manufacturer. Bagco North commenced operations at
sharada phrase 3, Kano in 1991. The 1990 saw both Bagco and Bagco North
developed a product range of plain woven and laminated bags to meet the demands
of Industrial, Agricultural and Domestic customers. Bagco Group had now truly
become a house hold name with everybody knowing "Bagco Super Sack".
In 1999 Bagco again showed its pioneering spirit with the
introduction to Nigeria of the Adstar polypropylene cement sack. The first of ten
machines was installed and the Adstar bags had recorded some level of success
within the cement industry. Today Bagco supplies major cement companies
throughout Nigeria and have virtually completely replaced the old paper package
within the polypropylene. Bagco's newest company, Bagco Morpack Nigeria Limited
(Bagco Morpack) was incorporated in 2006, based at Eric more Road, Surulere,
Lagos. Bagco Morpack has been established to produce printed flexible packaging
of foods and chemical industries. (Initial production which will commence in
the first half 2008).
1.1.2 NATURE OF
BUSINESS ACTIVITIES
Nigerian Bagco Manufacturing Company (Bagco) and Northern Bag
manufacturing company both operate state of the art production units for woven
polypropylene packing.
The main business of the company is the manufacturing of
woven polypropylene sack used by industrial market like, cement, detergent,
salt, fertilizer and flour with customize packaging solutions that meet their
volume and quality requirement.
It is also used for agricultural markets, a wide variety of
"super sack" and "kakaki" bags to pack grains, fruit and
vegetables. And it is also used for packaging of nails and used as a shopping
bag.
Bagco Group is one of largest supplier to Nigeria Independent
customers of woven polypropylene bags. And Bagco Group is working hard to
maintain this position as Nigeria premier quality supplier through development
projects with customers that are focused on enhancing the supply chain of today
and tomorrow.
1.1.3 ORGANISATION STRUCTURE
The board of BAGCO is composed of eleven (11) members made up
of five (5) Executive and seven non-Executive Directors. The board members are
professionals and entrepreneurs with credible track records.
Responsibilities at the top of the company are well defined
and the Board is not dominated by one individual. The position of the Chairman
is separate from the Chef Executive. The Chairman is not involved in the
day-to-day operations of the company.
The non-executive Directors, seven (7) are of strong caliber
and contribute activity to Board deliberations and decision making. However,
non-Executive Directors are not appointed for a fixed period, but shall instead
remain in office until the company determines their tenure or by operation of
law.
The Executive Directors, the remuneration of the Chief
Executive office is fixed by the board.
The board established committee is chaired by non - Executive
Directors and composed of other non - Executive Director. Full disclosure is
provided for Director's remunerator. I.e. the highest paid Director and
remunerator of the Chairman.
ORGANIZATIONAL CHART
Nigeria Bag manufacturing Company (BAGCO)
Board of Directors
Chairman
Managing Directors
Director Managing Director Deputy Managing Director
(Administration)
(Production & Technical)
Personnel Commercial
Marketing Production Technical
Director
Director Director Director Director
Personnel Chief Marketing Production
Technical
Manager Accountant
Manager Manager Manager
Cost
Financial Data
processing Banking
Accountant Accountant
Manager Manager
Wages/Salaries Manager Chief Cashier Assets Manager
Accounting Accounting Accounting
Officers Officers Officers
Clerical Clerical Officers Clerical Officer
1.2 STATEMENT OF PROBLEM
Decision in relation to management of working capital could
be seen as one of the strategic decision of a firm because it affects the
operation of efficiency and a determinant of the future prospect of the firm.
No matter how profitable a venture or project may be a liberal or venture may
reveal situations of Under-Trading or Over-Trading. Over-trading, otherwise
called under capitalization is a situation where a business tries to do too
much too quick with too little working capital and liquid resources.
It is usually and ailment afflictions most firms where such
firms expand beyond the capacity of their capital structure of base (Wookf,
1984).
On the other-hand, under-trading otherwise referred to as
over capitalization, it is a situation where too much investment is made in
working capital asset for expedient that investment in capital asset for
expansion purposes are prevented. This problem however depicts a situation
where afumcapital is represented by employed. (Olowe, 1997).
A company must maintain a suitable working capital position
as excess or shortage of it could be detrimental to the company, despite this
many companies are still lot aware of the importance of working capital as an
operational requirement.
The problem of this study therefore is to determine ways by
which management ensures current investment in working capital, and also watch
out for the signals of the existence of these problems, with an attempt at
remedying the situation through the managerial effort on working capital.
1.3 SIGNIFICANCE OF THE STUDY
An important consideration on working capital management is
determines the amount of working capital and how working capital should be
financed.
This study will help to know how this vital aspect at the company's
resources is being managed. This study will also highlight the benefits and
problems associated with the management will therefore give an understanding of
the cause and consequence of over-capitalization and under capitalization and
the remedial actions necessary to overcome these problems.
More so, the study will give business organizations and
ventures a revenge of understanding of how to ensure adequate, optimal and
correct investment on working capital for different levels of business activities.
The effects of risk and profitability of management of
working capital will be evident from the study.
In addition, this study will be of benefit to finance
managers in business organizations, potential investors, student of corporate
governance, other stake holders and the general public.
1.4 OBJECTIVES OF THE STUDY
Working capital management is an area that every
organizations most pay serious attention to in order to meet with the dynamic
business environment. The objective of the study shall specifically include the
following:
1. To identify the
nature and relevance of working capital to business operations.
2. To give an
insight and understanding of the damaging effects on organization performance
of lack of adequate working capital on the other hand.
3. To show that
large holding of current assets especially cash Strengthens a firm's liquidity
position but reduces the overall profitability.
4. To find out the
problems uncounted by the management in the administration of working capital
and to make suggestions on how to overcome the problems.
5. To ensure the
most efficient use of resources open to the firm and it’s also involves making
sure that the commitment to working capital is a low as possible.
6. To ensure that
current amounts of investment are made by firms in working capital and adequate
enough to cope with the business level being operated by the firm.
7. To know the
amount to be invested in current assets and the appropriate sources from which
the finance will come from.
1.5 STATEMENT OF
RESEARCH QUESTION
The research questions to be used in this study are:
1. What is the
relevance of working capital for the operations to the operations of a
business?
2. Is there any
industry norm, as regards the level of investment in working capital?
3. What is the minimum
required investment in working capital by an organization?
4. What are the
working capital cycle and its implication on the working capital requirement of
an organization?
5. Does the type of
business being operated whether in the manufacturing or service sector affect
the level of investment in the various components of working capital?
6.Can investment in working capital be kept to its bearest
minimum.
1.6 RESEARCH
HYPOTHESIS
The validity of the following hypothesis will be tested in
this research study.
1. That the working
capital requirement of a business venture is dependent on the level of business
that has been established.
Ho: The working capital requirement of a business venture is
not dependent on the level of business that has been established.
Hi:The working capital requirement of a business venture is
dependent on the level of the business that has been established,
2. That excessive
working capital can increase production cost.
Ho:Excessive working capital cannot increase production cost.
Hi:Excessive working can increase production cost.
3. That the longer
the working capitals cycle of an organization the greater the investment in
working capital.
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