The document discusses working capital management. It covers topics such as the cash operating cycle, funding current assets, managing inventory, accounts receivable, accounts payable, and cash. The objectives of working capital management are to maximize profitability while maintaining adequate liquidity and financial stability. Effective working capital management requires balancing current assets, current liabilities, and sources of short-term and long-term financing.
Working capital capital management and finance ianita rani
Working capital refers to the capital required to finance short-term assets like cash, inventory, and accounts receivable. It is needed to ensure a company has enough liquidity to operate day-to-day and take advantage of opportunities. There are two main concepts of working capital - the balance sheet approach looks at it as current assets minus current liabilities, while the operating cycle approach sees it revolving as assets are purchased, produced as inventory, and sold to generate receivables. Proper management of working capital is important, as too much can be unprofitable while too little can threaten solvency. Forecasting working capital needs considers factors like production costs, credit terms, and cash requirements.
Working capital refers to the capital required for financing short-term assets such as cash, inventory, and accounts receivable. It is also known as revolving or circulating capital. There are different types of working capital like gross working capital, net working capital, permanent working capital, and temporary working capital. Management of working capital involves maintaining optimal levels of current assets and current liabilities to ensure sufficient liquidity and an efficient balance between risk and profitability.
3174 fm lecture 6 - working capital managementisaacsuiyu
Working capital refers to a company's short-term assets and liabilities related to day-to-day operations. It includes current assets like inventory, receivables, and cash, as well as current liabilities like payables. Managing working capital involves setting policies for maintaining optimal levels of current assets and financing them appropriately through short-term debt or long-term sources. The objective is to ensure sufficient liquidity while maximizing returns through efficient management of components like inventory, receivables, and payables.
Working capital management_shweta_patilShweta Patil
This document discusses working capital and working capital management. It begins with definitions of working capital as the funds used in a business for day-to-day operations, including current assets like inventory, accounts receivable, cash. Working capital management involves managing current assets and liabilities to ensure adequate but not excessive working capital. The document outlines types of working capital, factors that affect working capital needs, and strategies for managing working capital levels including the operating cycle and cash conversion cycle. Key components of working capital management are also discussed like inventory, receivables, and cash management.
This document provides an overview of working capital management at Federal Mogul Corporation. It discusses the company's mission, finance department structure, research methodology, objectives of the study, principles of working capital, classifications of working capital, needs for working capital, determinants of working capital, and management of receivables, creditors, inventory and cash. Key aspects covered include maintaining adequate current assets to meet liabilities, turnover ratios to evaluate liquidity over time, and conclusions regarding the company's satisfactory but improving liquidity position.
1. Working capital refers to a company's current assets and current liabilities. It is important for day-to-day operations and affects risk, return, and share price.
2. There are two types of working capital: permanent working capital for minimum needs and temporary working capital that varies seasonally.
3. Managing working capital properly balances liquidity, profitability, and risk, with different strategies taking different approaches in financing current assets.
This document discusses working capital management. It defines working capital as the funds used in a business for day-to-day operations, and explains that adequate working capital is important for efficiency and survival. It distinguishes between gross and net working capital, and discusses factors that influence working capital requirements like nature of business and credit terms. The document also outlines methods for estimating working capital needs based on current assets, operating cycles, and cash costs.
The document discusses working capital management. It covers topics such as the cash operating cycle, funding current assets, managing inventory, accounts receivable, accounts payable, and cash. The objectives of working capital management are to maximize profitability while maintaining adequate liquidity and financial stability. Effective working capital management requires balancing current assets, current liabilities, and sources of short-term and long-term financing.
Working capital capital management and finance ianita rani
Working capital refers to the capital required to finance short-term assets like cash, inventory, and accounts receivable. It is needed to ensure a company has enough liquidity to operate day-to-day and take advantage of opportunities. There are two main concepts of working capital - the balance sheet approach looks at it as current assets minus current liabilities, while the operating cycle approach sees it revolving as assets are purchased, produced as inventory, and sold to generate receivables. Proper management of working capital is important, as too much can be unprofitable while too little can threaten solvency. Forecasting working capital needs considers factors like production costs, credit terms, and cash requirements.
Working capital refers to the capital required for financing short-term assets such as cash, inventory, and accounts receivable. It is also known as revolving or circulating capital. There are different types of working capital like gross working capital, net working capital, permanent working capital, and temporary working capital. Management of working capital involves maintaining optimal levels of current assets and current liabilities to ensure sufficient liquidity and an efficient balance between risk and profitability.
3174 fm lecture 6 - working capital managementisaacsuiyu
Working capital refers to a company's short-term assets and liabilities related to day-to-day operations. It includes current assets like inventory, receivables, and cash, as well as current liabilities like payables. Managing working capital involves setting policies for maintaining optimal levels of current assets and financing them appropriately through short-term debt or long-term sources. The objective is to ensure sufficient liquidity while maximizing returns through efficient management of components like inventory, receivables, and payables.
Working capital management_shweta_patilShweta Patil
This document discusses working capital and working capital management. It begins with definitions of working capital as the funds used in a business for day-to-day operations, including current assets like inventory, accounts receivable, cash. Working capital management involves managing current assets and liabilities to ensure adequate but not excessive working capital. The document outlines types of working capital, factors that affect working capital needs, and strategies for managing working capital levels including the operating cycle and cash conversion cycle. Key components of working capital management are also discussed like inventory, receivables, and cash management.
This document provides an overview of working capital management at Federal Mogul Corporation. It discusses the company's mission, finance department structure, research methodology, objectives of the study, principles of working capital, classifications of working capital, needs for working capital, determinants of working capital, and management of receivables, creditors, inventory and cash. Key aspects covered include maintaining adequate current assets to meet liabilities, turnover ratios to evaluate liquidity over time, and conclusions regarding the company's satisfactory but improving liquidity position.
1. Working capital refers to a company's current assets and current liabilities. It is important for day-to-day operations and affects risk, return, and share price.
2. There are two types of working capital: permanent working capital for minimum needs and temporary working capital that varies seasonally.
3. Managing working capital properly balances liquidity, profitability, and risk, with different strategies taking different approaches in financing current assets.
This document discusses working capital management. It defines working capital as the funds used in a business for day-to-day operations, and explains that adequate working capital is important for efficiency and survival. It distinguishes between gross and net working capital, and discusses factors that influence working capital requirements like nature of business and credit terms. The document also outlines methods for estimating working capital needs based on current assets, operating cycles, and cash costs.
This document discusses principles of working capital management. It defines key concepts like gross working capital, net working capital, operating cycle, cash conversion cycle. It also discusses determinants of working capital requirements, issues in managing working capital, and methods of estimating and financing working capital needs. The document provides an overview of working capital management principles.
This document discusses the fundamentals of working capital management. It defines working capital as the funds used in current assets like inventory, accounts receivable, cash, and other assets needed to support daily operations. The determinants of working capital requirements are then outlined, including the nature of the business, production cycle, business cycle, production and credit policies, growth plans, supply conditions, profit levels, taxes, dividends, depreciation, price changes, and operating efficiency. Several determinants are explained in more detail such as production cycle, business cycle, production policy, credit policy, and conditions of supply.
This document discusses principles of working capital management including concepts like gross working capital, net working capital, operating cycle, and determinants of working capital. It covers estimating working capital needs based on current asset holding periods and sales ratios. Methods of financing working capital like long-term vs short-term financing are examined along with approaches like matching, conservative, and aggressive. Managing the risk-return tradeoff between liquidity and profitability is highlighted as a key issue.
Meaning
Types of working capital
Factors of determining working capital
Operating working capital cycle
Importance of operating cycle concept
Internal factors
External factors
General factors
Types of capital structure
Characteristics of security
This document discusses working capital management. It covers characteristics of current assets like short lifespans and transformation into other assets. Factors influencing working capital requirements include the nature of business, seasonality, production policy and market conditions. The document also discusses levels of current assets, financing policies, profit criteria and operating cycle analysis. It provides an example calculation of inventory period, accounts receivable period, accounts payable period, operating cycle and cash cycle for a company.
The document defines working capital as the capital required to finance short-term operating needs like current assets. It discusses the different types of working capital including gross and net working capital. It also covers key concepts related to working capital management such as operating cycle, determinants of working capital needs, and approaches to financing current assets using long-term vs short-term sources of funds.
The document discusses working capital management. It defines working capital as the funds required for day-to-day operations of a business. Working capital includes current assets like inventory, accounts receivable, and cash. It is necessary for purchasing raw materials and paying daily expenses. Effective working capital management involves cash, receivables, payables, and inventory management. Both deficient and excessive working capital can pose dangers for a business.
Working capital management ppt @ bec doms bagalkot mbaBabasab Patil
This document discusses working capital, which is defined as current assets minus current liabilities. It measures a company's liquid assets available to operate its business. The document outlines different components of working capital like inventory, accounts receivable, cash, and current liabilities like accounts payable. It also discusses the importance of managing working capital to ensure sufficient cash flow and meeting short-term obligations. Different approaches to determining a firm's working capital needs are discussed, including industry norms, economic modeling, and strategic choices based on a firm's specific business practices and goals.
The capital which is needed for the regular operation of business is called working capital. 1- for the purchase of raw materials
2- for the payment of wages
3- payment of rent and of other expenses
Working capital is kept in the form of cash, debtors, raw materials inventory, stock of finished goods, bills receivable etc.
Size Of Business
Nature Of Business
Storage Period
Credit Period
Seasonal Requirement
Potential Growth Or Expansion Of Business
Changes In Price Level
Dividend Policy
Working Capital Cycle
Operating Efficiency
Other Factors
Working capital requirement of a firm is directly influenced by the size of its business operation.
Big business organizations require more working capital than the small business organization.
Working capital requirement depends also upon the nature of business carried by the firm. Normally, manufacturing industries and trading organizations need more working capital than in the service business organizations.
A service sector does not require any amount of stock of goods. But in the manufacturing or trading firm, credit sales and advance related transactions are in large amount.
Time needed for keeping the stock in store is called storage period. The amount of working capital is influenced by the storage period. If storage period is high A firm should keep more quantity of goods in store and hence requires more working capital. if the storage Period is less , then more stock of goods must be held in store as work-in-progress.
The document provides an overview of working capital, including definitions, concepts, and management. It defines working capital as the capital required for financing short-term assets like cash, inventory, and receivables. There are two concepts of working capital - the balance sheet concept focuses on current assets and liabilities, while the operating cycle concept looks at cash flows through purchasing, production, and sales cycles. Proper management of working capital is important, as both excess and inadequate working capital can hurt a business. Factors like industry, sales, and inventory turnover affect working capital needs. Forecasting and estimating working capital requirements involves considering items like materials, production timelines, credit terms, and cash flows.
Okay, let me calculate the working capital requirement step-by-step:
1) Raw Material for 60000 units
= 60000 * 60% of Rs. 5 = Rs. 18,00,000
2) Work in Progress for 60000 units
= 60000 * 10% of Rs. 5 = Rs. 3,00,000
3) Finished Goods for 60000 units
= 60000 * 20% of Rs. 5 = Rs. 6,00,000
4) Debtors for 60000 units at selling price of Rs. 5 per unit
= 60000 * Rs. 5 = Rs. 3,00,000
5) Creditors for 2
ZA
Working capital management is important for business success. Gross working capital refers to total current assets, while net working capital is current assets minus current liabilities. Many factors affect a business's working capital requirements, including its nature, size, growth rate, production cycle, credit and purchasing policies, availability of materials and credit, profit levels, taxes, and price changes. Determining the optimal level of working capital is necessary.
This document provides an overview of working capital management. It defines working capital as current assets that can be converted to cash within a year to meet day-to-day operations. Working capital management aims to maximize shareholder wealth by managing sources and uses of working capital. It also discusses key aspects like gross and net working capital, operating cycle, factors that affect working capital needs, approaches to financing working capital, and tools for monitoring and controlling working capital. The document provides definitions and formulas to calculate different working capital metrics and estimates working capital requirements based on various operational factors.
The document discusses working capital, which is the cash needed for day-to-day business operations and is calculated as current assets minus current liabilities; it also covers liquidity ratios like the current ratio and acid test ratio to measure a business's ability to pay debts, and risks like overtrading that can occur if too much business is taken on without sufficient working capital. Managing working capital effectively through inventory, debtors, creditors and cash flow is important for business success.
This chapter included, Meaning and concepts of working capital Management , Operational environment for working capital Management and Determinants of working capital
The document discusses working capital management. It defines working capital as the excess of current assets over current liabilities. It lists the key components of working capital like inventory, receivables, cash, and payables. It discusses different types of working capital and factors that determine working capital requirements like the nature of business, production cycle, and access to credit. The objectives of working capital management are to optimize current asset investments and ensure current liabilities can be met in a timely manner. Components of working capital management include inventory management, cash management, and receivables management.
The document discusses factors affecting working capital in a manufacturing firm. It defines working capital and outlines the operating cycle from procuring raw materials to receiving payment from customers. Key factors determining working capital requirements include industry nature, sales volume, inventory levels, credit terms, and business cycles. Both excess and inadequate working capital can be problematic for businesses.
The document discusses key concepts related to working capital management including:
- Gross working capital refers to a firm's total investment in current assets like cash, inventory, and accounts receivable. Net working capital is current assets minus current liabilities.
- Determinants of working capital include the nature of the business, production cycle, inventory and credit policies, and growth plans.
- Operating cycle refers to the time period between a firm paying for raw materials and collecting cash from sales, and considers inventory conversion, collection of receivables, and deferral of payables periods.
The study analyzed the impact of working capital management on the profitability of 58 small manufacturing firms in Mauritius over the period of 1998-2003. The results showed that return on total assets, a measure of profitability, was positively correlated with measures of working capital management efficiency like accounts receivable days and cash conversion cycle. However, it was negatively correlated with accounts payable days. The paper concluded that synchronizing current assets and liabilities is important for small firm profitability and the paper industry showed best practices in working capital management.
There are two types of capital needed for a business: fixed capital and working capital. Fixed capital refers to assets used for longer periods, while working capital refers to short-term capital used for day-to-day operations like cash, inventory, and debtors. Working capital can be categorized as gross working capital, which looks at total current assets, and net working capital, which considers current assets minus current liabilities and indicates liquidity. Within working capital, there is core/fixed working capital, which is permanently invested in minimum current assets, and variable working capital to address fluctuations.
This document discusses principles of working capital management. It defines key concepts like gross working capital, net working capital, operating cycle, cash conversion cycle. It also discusses determinants of working capital requirements, issues in managing working capital, and methods of estimating and financing working capital needs. The document provides an overview of working capital management principles.
This document discusses the fundamentals of working capital management. It defines working capital as the funds used in current assets like inventory, accounts receivable, cash, and other assets needed to support daily operations. The determinants of working capital requirements are then outlined, including the nature of the business, production cycle, business cycle, production and credit policies, growth plans, supply conditions, profit levels, taxes, dividends, depreciation, price changes, and operating efficiency. Several determinants are explained in more detail such as production cycle, business cycle, production policy, credit policy, and conditions of supply.
This document discusses principles of working capital management including concepts like gross working capital, net working capital, operating cycle, and determinants of working capital. It covers estimating working capital needs based on current asset holding periods and sales ratios. Methods of financing working capital like long-term vs short-term financing are examined along with approaches like matching, conservative, and aggressive. Managing the risk-return tradeoff between liquidity and profitability is highlighted as a key issue.
Meaning
Types of working capital
Factors of determining working capital
Operating working capital cycle
Importance of operating cycle concept
Internal factors
External factors
General factors
Types of capital structure
Characteristics of security
This document discusses working capital management. It covers characteristics of current assets like short lifespans and transformation into other assets. Factors influencing working capital requirements include the nature of business, seasonality, production policy and market conditions. The document also discusses levels of current assets, financing policies, profit criteria and operating cycle analysis. It provides an example calculation of inventory period, accounts receivable period, accounts payable period, operating cycle and cash cycle for a company.
The document defines working capital as the capital required to finance short-term operating needs like current assets. It discusses the different types of working capital including gross and net working capital. It also covers key concepts related to working capital management such as operating cycle, determinants of working capital needs, and approaches to financing current assets using long-term vs short-term sources of funds.
The document discusses working capital management. It defines working capital as the funds required for day-to-day operations of a business. Working capital includes current assets like inventory, accounts receivable, and cash. It is necessary for purchasing raw materials and paying daily expenses. Effective working capital management involves cash, receivables, payables, and inventory management. Both deficient and excessive working capital can pose dangers for a business.
Working capital management ppt @ bec doms bagalkot mbaBabasab Patil
This document discusses working capital, which is defined as current assets minus current liabilities. It measures a company's liquid assets available to operate its business. The document outlines different components of working capital like inventory, accounts receivable, cash, and current liabilities like accounts payable. It also discusses the importance of managing working capital to ensure sufficient cash flow and meeting short-term obligations. Different approaches to determining a firm's working capital needs are discussed, including industry norms, economic modeling, and strategic choices based on a firm's specific business practices and goals.
The capital which is needed for the regular operation of business is called working capital. 1- for the purchase of raw materials
2- for the payment of wages
3- payment of rent and of other expenses
Working capital is kept in the form of cash, debtors, raw materials inventory, stock of finished goods, bills receivable etc.
Size Of Business
Nature Of Business
Storage Period
Credit Period
Seasonal Requirement
Potential Growth Or Expansion Of Business
Changes In Price Level
Dividend Policy
Working Capital Cycle
Operating Efficiency
Other Factors
Working capital requirement of a firm is directly influenced by the size of its business operation.
Big business organizations require more working capital than the small business organization.
Working capital requirement depends also upon the nature of business carried by the firm. Normally, manufacturing industries and trading organizations need more working capital than in the service business organizations.
A service sector does not require any amount of stock of goods. But in the manufacturing or trading firm, credit sales and advance related transactions are in large amount.
Time needed for keeping the stock in store is called storage period. The amount of working capital is influenced by the storage period. If storage period is high A firm should keep more quantity of goods in store and hence requires more working capital. if the storage Period is less , then more stock of goods must be held in store as work-in-progress.
The document provides an overview of working capital, including definitions, concepts, and management. It defines working capital as the capital required for financing short-term assets like cash, inventory, and receivables. There are two concepts of working capital - the balance sheet concept focuses on current assets and liabilities, while the operating cycle concept looks at cash flows through purchasing, production, and sales cycles. Proper management of working capital is important, as both excess and inadequate working capital can hurt a business. Factors like industry, sales, and inventory turnover affect working capital needs. Forecasting and estimating working capital requirements involves considering items like materials, production timelines, credit terms, and cash flows.
Okay, let me calculate the working capital requirement step-by-step:
1) Raw Material for 60000 units
= 60000 * 60% of Rs. 5 = Rs. 18,00,000
2) Work in Progress for 60000 units
= 60000 * 10% of Rs. 5 = Rs. 3,00,000
3) Finished Goods for 60000 units
= 60000 * 20% of Rs. 5 = Rs. 6,00,000
4) Debtors for 60000 units at selling price of Rs. 5 per unit
= 60000 * Rs. 5 = Rs. 3,00,000
5) Creditors for 2
ZA
Working capital management is important for business success. Gross working capital refers to total current assets, while net working capital is current assets minus current liabilities. Many factors affect a business's working capital requirements, including its nature, size, growth rate, production cycle, credit and purchasing policies, availability of materials and credit, profit levels, taxes, and price changes. Determining the optimal level of working capital is necessary.
This document provides an overview of working capital management. It defines working capital as current assets that can be converted to cash within a year to meet day-to-day operations. Working capital management aims to maximize shareholder wealth by managing sources and uses of working capital. It also discusses key aspects like gross and net working capital, operating cycle, factors that affect working capital needs, approaches to financing working capital, and tools for monitoring and controlling working capital. The document provides definitions and formulas to calculate different working capital metrics and estimates working capital requirements based on various operational factors.
The document discusses working capital, which is the cash needed for day-to-day business operations and is calculated as current assets minus current liabilities; it also covers liquidity ratios like the current ratio and acid test ratio to measure a business's ability to pay debts, and risks like overtrading that can occur if too much business is taken on without sufficient working capital. Managing working capital effectively through inventory, debtors, creditors and cash flow is important for business success.
This chapter included, Meaning and concepts of working capital Management , Operational environment for working capital Management and Determinants of working capital
The document discusses working capital management. It defines working capital as the excess of current assets over current liabilities. It lists the key components of working capital like inventory, receivables, cash, and payables. It discusses different types of working capital and factors that determine working capital requirements like the nature of business, production cycle, and access to credit. The objectives of working capital management are to optimize current asset investments and ensure current liabilities can be met in a timely manner. Components of working capital management include inventory management, cash management, and receivables management.
The document discusses factors affecting working capital in a manufacturing firm. It defines working capital and outlines the operating cycle from procuring raw materials to receiving payment from customers. Key factors determining working capital requirements include industry nature, sales volume, inventory levels, credit terms, and business cycles. Both excess and inadequate working capital can be problematic for businesses.
The document discusses key concepts related to working capital management including:
- Gross working capital refers to a firm's total investment in current assets like cash, inventory, and accounts receivable. Net working capital is current assets minus current liabilities.
- Determinants of working capital include the nature of the business, production cycle, inventory and credit policies, and growth plans.
- Operating cycle refers to the time period between a firm paying for raw materials and collecting cash from sales, and considers inventory conversion, collection of receivables, and deferral of payables periods.
The study analyzed the impact of working capital management on the profitability of 58 small manufacturing firms in Mauritius over the period of 1998-2003. The results showed that return on total assets, a measure of profitability, was positively correlated with measures of working capital management efficiency like accounts receivable days and cash conversion cycle. However, it was negatively correlated with accounts payable days. The paper concluded that synchronizing current assets and liabilities is important for small firm profitability and the paper industry showed best practices in working capital management.
There are two types of capital needed for a business: fixed capital and working capital. Fixed capital refers to assets used for longer periods, while working capital refers to short-term capital used for day-to-day operations like cash, inventory, and debtors. Working capital can be categorized as gross working capital, which looks at total current assets, and net working capital, which considers current assets minus current liabilities and indicates liquidity. Within working capital, there is core/fixed working capital, which is permanently invested in minimum current assets, and variable working capital to address fluctuations.
The document discusses what a fund flow statement is and how to prepare one.
A fund flow statement shows changes in a company's working capital between two balance sheet dates by tracing the sources and uses of funds. It is prepared by analyzing changes in current assets and current liabilities, and adjustments such as funds from operations. The statement lists sources of funds like profits and financing activities, and uses of funds like purchases of assets and debt repayments. The objective is to analyze why a company's working capital increased or decreased over a period.
Effects of operating and financial leverage on profit, Measurement of leverages, Analyzing alternate financial plans, combined financial and operating leverage.
what is fund flow statement, current and noncurrent assets and liabilities, objectives, characteristics, and limitations of fund flow statement, how to make fund flow, format of fund flow, sources of fund flow
The document discusses concepts related to working capital management. It defines working capital as the difference between current assets and current liabilities. It discusses various types of working capital like gross, net, permanent, temporary, etc. It explains the working capital cycle and requirements of working capital for different types of businesses. It discusses objectives, measurement, and management of working capital and provides methods to estimate working capital requirements like percentage of sales method and regression analysis method.
Topic 4 Financial Levarage And Capital Structureshengvn
1) Leverage increases the variability of both EPS and ROE. It amplifies gains in good years but also amplifies losses in bad years.
2) Break-even EBIT is the level of earnings where EPS is the same under the current and proposed capital structures. It indicates whether leverage will increase or decrease stockholder wealth.
3) The optimal capital structure balances the tax benefits of debt against the costs of financial distress and bankruptcy. It occurs when the benefit of an additional dollar of debt is offset by the increased expected bankruptcy costs.
Advertising involves the preparation and dissemination of messages through paid media to make people aware of and favorably inclined towards a product, brand, service, idea or point of view. It aims to create demand and compel action. Advertising provides information, creates new demand, instructs on product use, and encourages consumers. It has benefits for manufacturers, salespeople, and consumers. However, it can also increase prices, encourage luxury spending, and involve false or misleading claims. Publicity differs in that it involves generating unpaid media coverage to manage public perception of a subject such as a person, organization, or product. Its goals are to build credibility and shift demand through favorable or unfavorable impressions.
This document discusses three types of leverage: operating, financial, and combined.
Operating leverage is defined as the percentage change in earnings before interest and taxes (EBIT) divided by the percentage change in sales. Financial leverage is defined as the percentage change in earnings per share (EPS) divided by the percentage change in EBIT. Combined leverage is the product of operating leverage and financial leverage, and represents the overall financial risk of a company. The document provides formulas for calculating each type of leverage and notes that high operating leverage combined with high financial leverage poses the greatest risk.
This document discusses various public relations, publicity, and corporate advertising strategies and tactics. It defines public relations as managing relationships with the public through identification of policies and procedures. It also discusses marketing public relations functions like building excitement, creating news, and influencing opinion leaders. Finally, it provides examples of different public relations tools, measurements of effectiveness, and types of corporate advertising.
- Leverage provides the framework for financing decisions and can be defined as using an asset or source of funds that requires paying a fixed cost or return.
- Operating leverage is associated with fixed operating costs and how much they magnify changes in sales on operating profits. Financial leverage measures how debt impacts changes in earnings per share.
- Degree of operating leverage (DOL) and degree of financial leverage (DFL) are used to measure the sensitivity of profits and earnings to changes in sales and operating profits respectively. Higher leverage means greater risk but also greater potential returns.
Leverage refers to using debt, borrowed money, or derivative instruments to amplify gains and losses from investments or business operations. There are two types of leverage: operating leverage, which is the use of fixed operating costs, and financial leverage, which is the use of fixed financing costs. The document defines various leverage metrics such as degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of combined leverage (DCL) which measure how changes in sales, operating income, and earnings per share are amplified through the use of leverage.
Publicity involves generating news about a company, product, or person through various media channels to increase public awareness. It differs from advertising in that companies do not pay for the exposure they receive. While publicity is a free form of promotion, companies have little control over the messages and can potentially receive negative coverage. Effective publicity strategies include creating buzz, making announcements, and leveraging relationships with journalists to obtain coverage.
This document defines and explains various types of leverage including accounting, notional, economic, operating, and financial leverage. It also discusses degrees of operating leverage, financial leverage, and total leverage. Leverage involves using assets, equity, debt, or derivatives to multiply gains and losses. It allows firms to magnify returns but also increases risk. The document provides examples of calculating break-even points in units and sales. Operating leverage reflects the impact of revenue changes on profits while financial leverage depends on a firm's capital structure.
Public relations is a management function that deals with public issues and building positive images. An important component is publicity, which uses unpaid media coverage to attract attention to products and services. The objectives of PR include promoting goodwill, new products, and providing information to employees and stakeholders. PR tools include press releases, newsletters, interviews and sponsored events. PR strategies can be proactive by creating detailed plans or reactive by addressing weaknesses. Publicity is a form of non-personal communication used to generate interest in people and products through the media. Corporate advertising builds confidence in a company among consumers and businesses to promote positive reputation.
The document discusses various aspects of financial management including its definition, scope, traditional and modern approaches, functions, objectives, and sources of finance. Specifically, it defines financial management as dealing with planning and controlling a firm's financial resources. It also discusses the functions of investment, financing, and dividend decisions and how financial management aims to maximize profit and shareholder wealth.
This document provides an overview of public relations (PR), including definitions, functions, advantages, disadvantages, and the role of a PR officer. PR is defined as managing communication between an organization and its publics to influence opinion. It aims to maintain a certain viewpoint about a company, its leadership, products, or other topics. PR functions include promoting goodwill, corporate image, and countering negative publicity. Advantages include credibility and reaching specific groups, while disadvantages include difficulty quantifying benefits and lack of control. The role of a PR officer is to act as an advocate, communicator, problem solver, and opinion leader for a company. PR can also be used for marketing purposes known as marketing PR.
Human: [SUMMARY
The document discusses various aspects of financial management including its objectives, scope, sources of finance, and types of shares. Financial management deals with procuring and utilizing funds in a balanced manner to maximize profit and returns. The basic objectives are profit maximization and maintaining liquidity, while other objectives include fair returns, building reserves, and ensuring efficiency. Sources of finance discussed include equity shares, preference shares, debentures, and retained earnings.
Leverage refers to using fixed costs to increase returns for owners. In finance, leverage allows firms to use fixed-cost funds like debt and preferred shares to increase earnings for equity shareholders. There are three types of leverage: operating, financial, and combined. Operating leverage measures how fixed costs affect operating income with sales changes. Financial leverage measures how interest expenses affect EPS. Combined leverage multiplies operating and financial leverage to measure total leverage.
This document discusses several models of consumer buying behavior:
- Traditional models include the economic, learning, psychological, and sociological models.
- Contemporary models include the Howard-Sheth model, Nicosia model, Engle-Kollat-Blackwell model, EBM model, and organizational buying models.
- The Nicosia model explains consumer behavior as a system with stimuli as input and behavior as output across four fields: consumer/firm attributes, search/evaluation, purchase, and post-purchase.
This document summarizes a research study that examined the relationship between working capital management and profitability for non-listed firms in Ghana from 2004-2009. The study used cash conversion cycles and its components (days of receivables, days of inventory, and days of payables) as measures of working capital management. Gross operating profit to total assets was used as the measure of firm performance. The results showed that profitability was negatively related to the length of the cash conversion cycle. Specifically, performance was positively affected by reducing days of receivables and days of inventory. Additionally, firm size, GDP growth, and sales growth positively impacted performance. The study suggests that managers in emerging markets should focus on effective working capital management to improve
This document summarizes a research report on the relationship between working capital management and profitability. The report analyzes data from 60 Pakistani textile companies over 2001-2006. The results show a statistically significant negative relationship between profitability (measured by return on assets) and the number of days accounts receivable, inventory, and accounts payable are outstanding. Proper management of working capital through optimizing current assets and liabilities can thus improve company profits. The report also acknowledges the importance of balancing liquidity and profitability in working capital management.
Effect of working capital on profitability in indian markets and concept of z...mvkdel
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This document summarizes a study examining the relationship between working capital management and profitability among Indian manufacturing firms. The study uses financial data from 1,198 manufacturing firms over a 5-year period. Correlation analysis found negative relationships between measures of working capital management (debtor's days, inventory days, creditor's days, cash conversion cycle) and firm profitability. Regression analysis will further examine these relationships to determine how adjusting elements of working capital management could impact profitability. The results aim to provide Indian manufacturers insights on variables that influence their profits.
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Working capital management profitability an empirical analysisIAEME Publication
This document summarizes a study examining the relationship between working capital management and profitability among Indian manufacturing firms. The study uses financial data from 1,198 manufacturing firms over a 5-year period. Correlation analysis found negative relationships between measures of working capital management (debtor's days, inventory days, creditor's days, cash conversion cycle) and firm profitability. Regression analysis will further examine these relationships to determine how adjusting elements of working capital management could impact profitability. The results aim to provide Indian manufacturers insights on variables that influence their profits.
Nwankwo, odi an empirical analysis of corporate survival and growth ijsaid ...William Kritsonis
The document summarizes a research paper on efficient working capital management as a prerequisite for corporate survival and growth. It discusses how working capital, consisting of current assets like cash, accounts receivable, inventory, and current liabilities, must be efficiently managed for a company to continue operating and growing over time. The researchers examined different aspects of working capital management, including inventory management, accounts receivable, cash position, and suggested measures to improve efficiency. Their findings showed that inefficient working capital management can lead to issues like excess inventory, inability to pay bills, and unproductive cash that hurts a company's survival and growth.
Nwankwo, odi an empirical analysis of corporate survival and growth ijsaid ...William Kritsonis
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Determinants of working capital management case of nigerian
1. Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.5, No.14, 2014
49
Determinants of Working Capital Management: Case of Nigerian
Manufacturing Firms
R.O. Salawu1*
,J. A. Alao2
1.Department of Management Accounting, ObafemiAwolowo University, Ile-Ife Osun State.Nigeria
Email: osalawu02@yahoo.co.uk
2.Department of Banking and Finance, Bowen University, Iwo Osun State.Nigeria
Email: alaojohn54@yahoo.co.uk
Abstract
This study explored the factors determining the working capitalwith the view to providing information on
empirical tests that constitutes the determinants of working capital management in the listed manufacturing firms
in Nigeria.
The study used secondary data sources which were collected from the Annual Report and Accounts of sixty
purposively selected non-financial quoted companies in the Nigerian Stock Exchange Fact book. Data on
financial variables such as sales, purchases, inventory, creditors, debtors and total assets were extracted from the
Annual Reports of these non-financial quoted companies between the periods 2000-2009. This was when the
country started to experience financial policies for the banking sector under the democratic dispensation.
Macroeconomic data on the annual growth rate of the Gross Domestic Product was obtained from the Statistical
Bulletin of the Central Bank of Nigeria. Data collected were analyzed using descriptive and inferential statistics.
The results showed that the significant factors determining working capital included sales growth, size of the
firm, gross domestic product, leverage. The proportion of fixed assets to total assets and the net trading cycle,
also determined working capital but were not significant at the five percent level.
Keywords: working capital management, purposive, non-financial quoted companies, financial policies,
democratic dispensation.
Introduction
Corporate finance basically deals with three decisions: capital structure decision, capital budgeting decision and
working capital management decisions. Among these, working capital management defined as the ability of an
organization to fund into the short term asset and short term liability is a very important component of corporate
financing since it affects the profitability and liquidity of a firm or company and finally, its value Harris (2005).
It deals with the way of financing current assets and liabilities. Its main goal is to ensure that companies have
sufficient cash-flow to continue normal operations in such a way that minimize risk of inability to pay short-term
liabilities Brigham &Gapenski (1994). Working capital management is important because of its effects on the
firm’s profitability and risk, and consequently, its value Smith (1980). Firm value is more important to have
sustainable growth rate for a business to attract prospective investors. Since value of the firm is the form that
investors motivate to invest in the business, an increase of value will benefit the firm’s prestige by increasing
future growth.Management of working capital helps managers to manage their operation of the firm through
making available cash to pay for short-term debt and the maturity of long term debt as well as expenses resulting
from daily operations. So, an optimal level of working capital must bekept to tradeoff between return and risk
Ranjith(2008).
Problem Statement and objective:Determining the important factors affecting working capital management
would help managers to determine the optimal level of investment in current assets as well as the appropriate
sources of financing them. In addition, they will be well prepared and ready for unpredicted situations that have
unexpected effects on firms’ performance. Little attention was given to the determinants of working capital
management while financial managers in Nigeria spent most of their time on working capital management.There
are scanty empirical evidences on the factors determining working capital management in the manufacturing
sector of the Nigerian economy. This study attempts to identify some of the factors which determine working
capital management in Nigeria manufacturing firms. The theoretical contribution will enrich the existing
literature by the determinants of working capital management in Nigeria manufacturing firms.
Literature Review
Theoretical Issues: The interaction between current assets and current liabilities is the main theme of the theory
of working capital management. The theory describe how working capital should be managed and demonstrate
the benefits in terms of liquidity, solvency, efficiency, profitability, and shareholders wealth maximization which
accrue to the company from appropriately managing capital Brigham, et al (1999), Gitman (1997). Efficient
working capital management implies sufficient liquidity in the operations of the enterprise and it involves
planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to
meet due short term obligations on one hand and avoid excessive investment on these assets on the other
2. Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.5, No.14, 2014
50
handGitman (1997). A firm is required to maintain a balance between liquidity and profitability while
conducting its day-to-day operations. Liquidity is a precondition to ensure that firms are able to meet its short-
term obligations and its continued flow can be guaranteed from a profitable ventureKesseven (2006).
Excessive as well as inadequate working capital positions are dangerous from the firm’s point of view.
Inadequate working capital not only impairs the firm’s profitability but also results in productions interruptions
and inefficiencies in sales disruptions. Too much working capital means holding costs and idle funds which earn
no profit asinventory mishandling, wastes, theft and losses result. Aside from this, tendencies of accumulating
inventories could cause speculative inventories to grow thereby fostering liberal dividend policy that might be
difficult to cope with when the firm is unable to make speculative profitRamamoorthy(1976), and Pandey(2004).
Conceptual Issues: The working capital needs of a particular business are likely to change overtime as a result
of changes in the business environment. This implies that working capital decisions are constantly being made.
Managers try to identify changes in an attempt to ensure that the level of investment in working capital is
appropriate. Changes in interest rates, changes in market demand, changes in the seasons, and changes in the
state of the economy are crucial to the determinant of working capital. Changes arising within the business such
as using different production methods (resulting perhaps in a need to hold less stock) and changes in the level of
risk that managers are prepared to take could also alter the level of investment in working capital. As a result of
expansion and contractions in the business cycle the investment in working capital will fluctuate in aggregate,
and the composition of the constituent components of the investment in working capital can be subject to a
considerable degree of volatility Richards and Laughlin(1980). The needs for working capital increase during
period of economic growth, and should decrease as economic growth contracts Weston and Brigham(1992). For
example when the economy is robust and in an expansionary phase, debtors and inventory may increase notably,
whereas with the onset of a recession a prudent business may apply more restrictive credit policies thereby
reducing credit sales, and hence debtors. Moreover production may be reduced because of a slacking in
consumer demand. This will in all probability result in a reduction of inventory. Some businesses tend to build
up working capital when the economy is strong, but then sell inventories and have net reductions of receivables
when the economy slacks off Brighman et al. (1999).
Just as changes in business conditions have an impact on debtors and inventory, so too will they have an impact
on the level of cash and on the forms and sources of financing of working capital. During an expansionary period,
the increase in sales and hence production needs to be paid for, which in the normal course of business leads to
an increased demand for cash. With the slowing of the cash conversion cycle during an economic slowdown, the
level of working capital is likely to rise temporarily and with it will be an increase in the need for cash to finance
a longer cash conversion cycle Asch and Kaye(1989), Richards and Laughlin(1980).
The business cycle has a considerable impact on the structure of time denominated assets (namely short-term and
long-term assets). During a recession consumption may decline, which may result in debtors declining, doubtful
and bad debts may increase, and stocks of unsold or unprocessed inventory may rise as production contracts;
while during an expansion, consumption may increase, and debtors may increase as sales increases
Nawrocki(1997). When the lending interest rate is high, firms would invest less in their working capital. During
the marketing downturn, most factors play more significant role in determining working capital management
while the factors appear to have less role for the firms that already have very high level of working capital. These
findings lend support to pecking order hypothesis and agency theory and are of great interest to investors,
corporate governors and regulators.
Further identifiable factors affecting working capital are: Nature, character and size of the business; seasonal
variations/market and demand conditions; manufacturing and credit policies; price level changes; rate of stock
turnover; the level of technology etc.
Essentially, the management of working capital is influenced by external and internal factors. While external
macro factors are affecting all companies regardless of industry, only companies within a particular industry are
affected by external micro-factors. However, both opportunities and threats can arise from any of them. At an
organization level, a set of internal factors impact on all processes and activities including working capital
management but in different manners according to the direction and relationship between them. Consequently an
ability to interpret and respond to the changes in these environmental variables is critical Johnson and Soenen
(2003).
Other notable factors are monetary policy and the manner in which it is implemented by virtue of its impact on
price levels and exchange rate, fiscal policy because of the impact of taxation and the term structure of interest
rates because of its impact on the cost of finance of different maturities Gitman(1997), Brigham and
Gapenski(1994).
Empirical Evidence
Chiou and Cheng (2006) considered the factors affecting working capital management in Taiwan firms. The
study considered both external and internal variables i.e. macroeconomic and firm specific variables. Their
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findings indicated that (i) during the economic slump, firms have more working capital requirement, (ii) debt
ratio, operating cash-flow to total assets are negatively associated to the working capital requirement (iii) Firm’s
age, return on assets are positively associated with working capital requirement.
Nazir and Afza (2008) examined the various factors that determine working capital requirement for 204
manufacturing firms for the period 1999-2006 in Pakistan. The results based on panel OLS estimation, found
that operating cycle, leverage, return on assets (ROA) and Tobin’s q are the internal factors which significantly
influence working capital. The result also showed that working capital management practices are also related to
industry and different industries are following different working capital requirements.
Caballero et al (2009) conducted a study to determine working capital management in small and medium-sized
Spanish corporations (SMEs). The panel of 4076 SMEs firms over the period 2001-2005 was selected. Cash
Conversion Cycle (CCC) was used as a comprehensive proxy for the efficiency of working capital management.
Panel data analysis including OLS, regression and fixed effect model were applied. Their results indicated that (i)
firms with longer CCC are older firms with more cash-flows. (ii) the CCC correlated negatively to the debt ratio,
firm’s growth, fixed assets investment and return on assets. (iii) No evidence for the effect of interest rates and
GDP on the CCC.
Zaryawati et al (2010) investigated important factors which affect working capital management in Malaysian
firms. Panel data analysis including pooled OLS regression was employed and the results compared to fixed
effect and random effect models for robustness tests. Results indicated that (i) firm size; debt ratio and sales
growth have negative relationship with the CCC. (ii) firms with more debt have less working capital since the
cost of external financing is higher for these firms. (iii)a negative relationship between CCC and sales growth
indicated that corporations use short-term financing to supply future demands. The positive relationship between
economic growth and working capital indicated that firms expanded their investment on working capital during
economic boom. Result found no evidence for the impact of corporate governance variables on working capital
management.
Gill (2011) focused on the Canadian companies to determine working capital management. Applying panel data
analysis, OLS regression and correlation coefficient, his results showed that working capital requirement
positively correlated to the operating cycle, return on assets. Result further shows that working capital
requirement negatively correlated to the firm size and Tobin’s q. His findings indicated no significant
relationship between working capital requirement, debt ratio and operating cash-flow.
Akinlo, (2012) Investigated the determinants of working capital requirements of 66 firms in Nigeria using panel
data for the period 1997-2007 and the GMM. The results suggested that sales growth, firms’ operating cycle,
economic activity, size and permanent working capital are firm specific characteristics that positively drive
working capital policy. Leverage was found to be inversely related to working capital requirements. The findings
suggest that some of the insights from modern finance theory are potable to Nigeria.
Abbadi and Abbadi, (2013) studied the variables that determine working capital in Palestinian industrial firms.
They established an econometric model and estimated parameters based on panel data for 11 Palestinian
industrial companies listed on the Palestinian Security Exchange for the period 2004 to 2011. The study used
working capital as the endogenous variable and some financial and economic variables such as cash conversion
cycle, operating cash flow, leverage, farm size, return on assets, interest rate on loans and economic growth as
exogenous variables. The study found that cash conversion cycle, return on assets and operating cash flow are
significant determinants positively related to working capital requirement, while leverage and firm size are also
significant but negatively related to working capital requirement. Economic variables such as interest rate and
read GDP growth rate have no significant impact on working capital. Study also found that Palestinian firms
maintain a sizable working capital which may be due to a long cash conversion cycle (over six months) and to
conservative policies due to instable economic and political conditions.
Methodology
As at the time of this study, 237 firms cutting across over fifteen sectors of the Nigerian economy were listed on
the Nigerian Stock Exchange. Only 186 firms are actively traded on the floor of the Exchange. These constitute
the population for this study. The study excluded the financial sectors i.e. banking, insurance and investment
sectors because of the peculiarity in their cash holding policies which are substantially different from that of the
non-financially quoted companies. Sixty (60) nonfinancial quoted firms were purposively selected on sect oral
basis such as breweries, chemical and paint, food and beverages, industrial/domestic products etc. The
preparation and submission of annual reports covering the period of study (2000-2009), and the going concern
basis qualifies a firm for selection. The selected firms from each sector are contained in table (i). Secondary data
were employed consisting of computed variables from the balance sheet as well as the profit and loss account of
the selected firms. Macroeconomic variables were sourced from the Central Bank of Nigeria’s 2010 statistical
bulletin.To investigate the determinants of working capital of selected quoted firms, we employed correlation
matrix to measure the degree of association between different variables under consideration; and regression
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analysis which entails the specifications of functional relationship between working capital requirement and its
determinants.
Model Specification
We state our model as follows:
WCit =αit + α1SGRit+ α2NTCit+ α3LOSit + α4PFAFit + α5LEVit + α6 GDP + α7 Control Variables +
ℇit……………………………………(i)
Where: WC represents the Working Capital
SGR is the sales growth
NTC is the Net Trading Cycle
LOS is the firm size
PFAF is the Proportion of firm’s asset represented by fixed assets
LEV is Leverage
GDP is Business indicator
This equation states that working capital requirements measured as difference between working liquid assets less
liquid liabilities and cash conversion cycle is a function of sales growth, net operating cycle, firm size,
proportion of a firm’s assets accounted for by fixed assets, leverage and business indicator measured as the
growth rate of the level of economic activity.
Measurement of variables
Working capital is measured as the difference between working liquid assets less liquid liabilities. Sales Growth
is measured as the current year sales less last year sales/ last year’s sales. Net Trading Cycle is measured as the
Average Collection Period plus (Inventory/ Net Sales) less (Accounts Payable/ Purchases). Firm Size is
measured as the Natural Logarithm of Sales. Proportion of Firms Asset represented by fixed asset is measured as
Fixed Assets/ Total Assets. Leverage is measured as Total Financial Debt/Total Assets. GDP is the business
indicator measured as the growth rate of the level of economic activity.
Results
The statistics of different variables in our model for the determinants of working capital are presented in table
(ii).The mean and median values are within the maximum and minimum values of the series. The relatively low
standard deviations for most of the series indicate that the deviations of actual data from their mean values are
very small. The statistics clearly show that the series are positively skewed meaning that all distributions have
long right tail. In terms of the peakness or flatness of the distribution of the series measured by kurtosis, the data
showed that the series are peaked relative to the normal except for the GDP. This is because the kurtosis of the
other series exceeds 3. The probability that the Jaque-Bera statistic exceed (in absolute value) the observed value
is generally low for all the series. This suggests the rejection of normal distribution at 5%.
The correlation matrix on table (iii) captured the variables in our model for the determinants of working capital.
Leverage, size of the firm, proportion of fixed assets to total assets, sales growth and business indicator are
positively related to working capital. This suggests that as these variables increases, working capital also
increases.
Empirical models
The results of the determinants of working capital using panel regression models such as fixed effect and random
effect model are presented on tables (iv) and (v). On the panel least square fixed effects, the results show a
positive and significant relationship between the working capital and sales growth. This implies that increase in
sales growth leads to increase in working capital. Using this model as the lead, a 1% increase in sales growth
will lead to 0.046 increases in working capital. The coefficient of the net trading cycle is positive and
insignificant in model II while it is negative and insignificant in model 1. The logarithm of sales is used to
measure the size of the firm. The relationship between the size and working capital is positive and significant in
the two models. This corroborates the view that larger firms have more financing alternatives available; hence
these firms more easily afford investments in working capital. Size measured by the logarithm of sales could
come out with a negative relationship when cash conversion cycle is used as a proxy for working capital. The
cash conversion cycle actually measures the efficiency of working capital management by firms. If the
regression comes out with a negative relationship, it will mean that the larger the firm size, the shorter the cash
conversion cycle or the smaller the firm size, the longer the cash conversion cycle, suggesting that smaller firms
should look for ways to shortening their cash conversion cycles.
The coefficient of the proportion of fixed assets to total assets is negative and insignificant in the two models.
This suggests that as the proportion of fixed assets to total assets increases, the working capital decreases. There
is no clear-cut definition of leverage in the academic literature. The specific choice depends on the objective of
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the analysis. An additional issue is whether leverage should be computed as the ratio of the book or the market
value of equity. We have measured leverage as the ratio of total financial debt to total assets. Our results show
that leverage is negatively and significantly related to working capital. This indicates that with a rising debt to
total assets ratio, the firms are supposed to pay more attention towards efficient management of Working Capital
to avoid much capital being tied up in accounts receivables and inventories. Hence, firms with an increasing debt
to total assets ratio (high leverage) show lower working capital requirement in support of the pecking order
theory.
In the two models the gross domestic product is positively and significantly related to working capital. As this
variable increases, working capital also increases. However, a fluctuation in the general economic activity in the
long-run is expected to be negatively related to working capital. It might not be easy for a firm to raise fund
during the period of economic fluctuations when cash supply is relatively tight. To retain capital for daily
operations, working capital requirement must be kept at a higher level, and business indicator is expected to be
negatively proportional to working capital. The expansion of a firm may not be as smooth as expected during
economic fluctuations, with possibly longer time periods for collecting accounts receivable or possibly expended
inventories due to decline in sales. Hence a relatively high net volume of working capital may occur.
Over the period of this study, the Nigerian economy did not witness significant progress in terms of economic
growth. Perhaps the financial sector experienced boom during the period. Unfortunately, the boom in the
financial sector did not filter into the productive sector especially the manufacturing sector. Increased lending
rate, inconsistent power supply among others resulted into very high production costs during the period of study.
This ripple effect of production leads to high product price and in a situation of elastic demand, consumers are
likely to abandon the product in favour of imported close substitutes. Eventually, the firm may go into
liquidation as it had been with the Nigerian Dunlop tyre and others leaving Nigeria for Ghana where the cost of
production and power generation are relatively stable. Again, the Stock Market had not much to offer during the
study period. This was as a result of the crash in the Stock Market.
Conclusions and Recommendations
Working capital management is crucial to firms as it is used to generate further returns for the shareholders.
Allocating more than enough of working capital will render management non-efficient with adverse effect on
short-term investments. If working capital is too low, the firm may miss a lot of profitable investment
opportunities or suffer term liquidity crisis that could lead to degradation of company credit. This explains the
rationale behind the knowledge of the determinants of working capital and its effects on profitability. Our study
shows that the determinants of working capital are sales growth, trading cycle, size, proportion of firms’ asset
represented by fixed assets, leverage and business indicator measured as growth rate of economic activity. We
recommend that these variables should be properly addressed to determine the optimal level of investments in
current assets as well as the appropriate sources of financing them. The model for future studies should include
as many other firm and nonfirm specific characteristics as evident in the literature.
Table (i) Sampled Firms
S/No Sector/Industry No. of Firms (Sample) Percentage%
1 Food and beverages 10 16.7
2 Printing and publishing 3 5.0
3 Chemical and paints 6 10.0
4 Industrial and domestic products 7 11.7
5 Breweries 5 8.3
6 Building materials 5 8.3
7 Health care 9 15
8 Agriculture/Agro allied 5 8.3
9 Textile 2 3.3
10 Footwear 2 3.3
11 Automobile &Tyre 2 3.3
12 Conglomerate 4 6.7
Total 60 100
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Table (ii)
Descriptive Statistics
SGR NTC LOS PFAF LEV GDP
Mean 0.248327 67.33065 6.392388 0.383231 1.874579 530564.2
Median 0.179085 3.495094 6.800015 0.35 1.645 544753.7
Maximum 2.784609 9440.63 11.16846 1.026639 23.52427 716949.7
Minimum -0.87364 -1372.78 1.92E-06 0.018727 -20.4854 329178.7
Std. Dev. 0.427012 568.6631 2.602353 0.206416 3.002946 124201.2
Skewness 2.962002 14.2846 -0.93265 0.789223 0.163871 -0.19553
Kurtosis 16.86175 233.605 3.319224 3.239764 27.40359 1.85819
Jarque-Bera 3029.893 719931.4 47.75037 33.98642 7941.902 19.42205
Probability 0 0 0 0 0 0.000061
Sum 79.4645 21545.81 2045.564 122.6339 599.8653 1.70E+08
Sum Sq. Dev. 58.1663 1.03E+08 2160.345 13.59177 2876.641 4.92E+12
Observations 590 590 590 590 590 590
Table iii
Correlation Matrix
CCC GDP LEV LOS NTC PFAF SGR WC
CCC
1 -0.08228 -0.00446 -0.1583 0.909762 -0.17573 -0.09706 -0.02356
GDP -0.08228 1 -0.07681 0.064105 -0.07855 0.118008 0.086507 0.030497
LEV -0.00446 -0.07681 1 0.068533 0.050306 0.066248 -0.05584 0.019528
LOS -0.1583 0.064105 0.068533 1 -0.06567 0.320675 0.057041 0.663758
NTC 0.909762 -0.07855 0.050306 -0.06567 1 -0.13317 -0.0505 0.068866
PFAF -0.17573 0.118008 0.066248 0.320675 -0.13317 1 0.054458 0.248822
SGR -0.09706 0.086507 -0.05584 0.057041 -0.0505 0.054458 1 0.006314
WC -0.02356 0.030497 0.019528 0.663758 0.068866 0.248822 0.006314 1
Source:AuthorsComputation.
Table (iv) Fixed Effect Model
Factors Determining Working Capital
Dependent variable: WC, Method: Panel Least Squares
Date: 09/07/1 Time: 12.19, Sample: 2000- 2009
Periods included: 10, Cross-sections included: 59, Total panel (balanced) observations: 590
Variable Coefficient Std. Error t-Statistic Prob.
C 0.080009 0.012570 6.365085 0.0000
SGR 0.046438 0.022480 2.065775 0.0093*
NTC -0.000643 0.010019 -0.064144 0.9489
LOS 0.010920 0.002760 3.956243 0.0001*
PFAF -0.000293 0.001578 -0.185425 0.8530
LEV -0.042766 0.012590 -3.396917 0.0007*
GDP 0.032010 0.012980 2.466148 0.0140*
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Effects specification
Cross-section fixed (dummy variables)
Period fixed (dummy variables)
R-squared 0.548841 Mean dependent var 0.153053
Adjusted R-squared 0.528038 S.D. dependent var 0.221505
S.E of regression 0.178852 Akaike info criterion -0.487680
Sum squared resid 16.50590 Schwarz criterion 0.061691
Log likelihood 217.8657 Hannan-Quinn criter. -0.273660
F-statistic 5.307212 Durbin-Watason stat 1.934631
Prob (F-statistic) 0.000000
*significiant at 5% level
Source: Authors Computa
Table (v) Random Effect Model
Dependent Variables: WC, Method: Panel EGLS (Two-way random effects), Date: 9/07/12. Time:12.19, Sample:
2000 -2009, Periods included: 10, Cross-sections included: 59, Total panel (balanced) observations: 590
Variable Coefficient Std. Error t-Statistic Prob.
C 0.080024 0.024967 3.205228 0.0014
SGR 0.35296 0.022075 1.598912 0.0104*
NTC 0.000214 0.009514 0.022463 0.9821
LOS 0.008104 0.002539 3.191682 0.0015*
PAFA -0.000733 0.001494 -0.490351 0.6241
LEV -0.047791 0.011997 -3.983689 0.0001*
GDP 0.036373 0.012507 2.908209 0.0038*
Effect specification
S.D Rho
Cross-section random 0.088416 0.1812
Period random 0.057718 0.0772
Idiosyncratic random 0.178852 0.7416
Weighted Statistics
R-squared 0.536072 Mean dependent var 0.049428
Adjusted R-squared 0.517387 S.D. dependent var 0.194495
S.E of regression 0.179591 Sum squared resid 18.80342
F-statistic 17.96957 Durbin-watson stat 1.939395
Prob (F-statistic) 0.000000
*Significant at 5% level
Source: Authors Computation
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