ABSTRACT
The stringent economic measures with its various economic implications and the continual depreciation in the value of naira compared with pond sterling and US Dollars has put a lot of pressure on the liquidity position of all companies in Nigeria . Under this prevalent economic situation, the need for effective and efficient management of working capital cannot be over-emphasized.
The objectives of this project centers around determining whether efficient working capital management is a necessary instrument for a successful business operation using the Nigerian Bottling Company (NBC) plc as a case study. NBC plc is chosen because it is one of the first three companies to reach a billion naira mark in turnover.
We will end up with a “dysfunctional decision making” if we manage each component of working capital (ie Current Assets and Current Liabilities) in isolation. There is therefore need to achieve a “goal congruence” by developing an “integrated approach” to working capital management. This will maximize the overall value of the firm.
The research method used is the case study type, and data was collected through the use of questionnaires, oral interview and findings based on the researcher’s good acquaintance or personal relationship with some managers and Accountants in NBC plc. Stratified random sampling was used and the sample size is 30 drawn from a population of 90 made up of Divisional Executives, plant managers, Accountants and other senior management staffs of NBC plc. The Chi-square was used to test the fire hypothesis formulated.
From the test I established that the components of working capital (cash, debtors, stock and creditors) are and efficient managed individually and collectively in NBC plc and that this has contributed to the success of NBC plc. The researcher can therefore conclude that effective and efficient management of working capital is a necessary instrument for the successful operation of NBC plc in particular and other business enterprises in general. Inspite of the above conclusion, the researcher proffered useful recommendations that will help NBC plc and other companies to achieve greater efficiency in the management of working capital.
CHAPTER ONE
1.0 INTRODUCTION- OVERVIEW OF THE MATTER
The introduction of stringent economic measures or programmes aimed at revamping the economic malaise of this country has affected the day to day business operations of most barge companies such as Nigerian Bottling company (NBC) Plc, for instance, the structural adjustment programme measures introduced in the 1990s aimed at the deregulation of the economy and moving it towards a free market economy where optimum resources allocation will be achieved through market force and the privatization programme which has poised Nigerian entrepreneurs to new areas of competition has affected business operations, under his situation, it is a survival of the fittest and the winner takes all to the importance of effective and efficient management of scarce resources cannot be over emphasized.
Recently, many companies are incorporated but increase.
Furthermore, investigations show that most of the failures can be attributed to liquidity a problem which is often caused by poor management working capital.
Working capital management organizations and as a driving force of a business organizations and financial managers. It is one of the biggest functions of a financial accountants or managers.
Hence, Anyaogu (1999:38) observed “working capital has been seen as the life blood of a business, it’s effective while its inefficient management can lead not only to loss of profits but also to ultimate downfall of what otherwise might be considered as a promising concern”.
Working capital management determines to a large extent the success of failure of a business. Working capital is an abstract term as a look in a typical financial statement will reveal that there is no single accounting or classification called working capital.
According to CIMA (1782), “Working capital is a capital is a capital available for conducting the day to day operation of a business, normally the excess of current assets over current liabilities”. Current assets are cash and other assets that can be easily converted to cash within one accounting year such as debtors stock and short term investments. Current liabilities are short term obligations, which normally fall due to payment within one accounting year such as creditors, bank overdrafts, current taxation and dividend payable.
Business organizations management each of the components of working capital in isolation. This creates rather than solve problems.
There is need for goal congruence in the management of all the components of working capital. This can only be achieved by an integrated approach to the management of working capital.
According to Leslie (1971), “working capital is the life wire of any enterprise” the need for its effective and efficient management in such a big company cannot be over emphasized.
1.1 STATEMENT OF PROBLEMS
An overview of business operations in Nigeria would reveal that most enterprises have the financial management problems as major problems that contribute to business failure.
The NBC Plc has been operating amidst problems of poor working capital management problems of how to maximize profit and minimize losses.
In most cases, decisions affecting components of working capital are taken based on subjective rather than objective(s) judgment. The objective of managing each of the components of working conflict with objective(s) of managing others. Thus, the management of the component in isolation often causes confusion rather than solving problem. Emphasis may be placed on the management of some components at the expense of other components of working capital.
In this research, we shall try to establish the following:-
* That working capital management is a summation of the management of the individual components of working capital, having in mind the optimum level of working capital required and unnecessarily the optimum levels of one component in isolation of the optimum level of others, and to apply the integrated approach in our examinations of working capital management as a necessary instrument for a successful operations of NBC,PLC.
* This will reveal of the effectiveness and efficiency (otherwise) in the management of working capital for a successful business operations.
1.2 OBJECTIVES OF THE STUDY
In this research project, we shall try to determine whether working capital management is a necessary instrument for a successful business operation in general and for Nigeria Bottling company, Plc in particular..
To achieve this central purpose, the following are the objectives of this study:
a. To identify the various component of working capital and their inter- relationship.
b. To determine the optimum level of each component of working capital required by an organization.
c. To examine the source of funds for financial working capital.
d. To study the application of the above working capital management procedures in the operations of Nigerian Bottling Company Plc.
e. To examine how the level of working capital can be mentioned to ensure that optimum level is not exceeded.
f. To make recommendations based on the findings.
g. To establish the need for goal congruence in the management of working capital to reduce conflicts and ensure that the total effect will maximize revenue and minimize cost.
1.3 SIGNIFICANCE OF THE STUDY
This research work will be of immense benefit in the following ways areas:
a. It will help managers and accountants of Nigerian Bottling Company Plc to improve on their decision making when it comes to management of working capital.
b. The research is intended to help business organizations,
its financial managers, accountant and policy makers to be conscious of the optimum level of each components of working capital and to know that the management of these components are not mutually exclusive.
c. It is also intended to provide study materials ( as a starting point) to students, other members of the Polytechnic Community, University Community and outside researchers who may be opportune to undertake more extensive research in this area or in a related field.
1.4 LIMITATION OF THE STUDY
Nonetheless, it was difficult to convince managers and accounts to give an unbiased response to my questionnaire and interview. Most of them felt that the study was initiated by management of NBC Plc.
The cost of running around to gather my primary and secondary data is a major constraint for an Ordinary National Diploma.
The outdated dates and information available for research purposes was also a major constraint to my research work.
1.5 SCOPE / DELIMITATIONS OF THE STUDY
This research will focus on the study of the various working capital components, the integrated approach to working capital management with a view to determine the optimum level of each components vis-a vis the optimum level of other components as it is applicable to NBC PLC and determing the effectiveness and efficiency in the use of working capital for the successful business operations in NBC PLC.
However, all the management and accounting treatment, principles and applications relating to working capital, management in NBC Plc shall not be discussed, for the purpose of this project we only need to use current liabilities as a substitute for creditors. Hence, the components of working assets and current liabilities. We shall also discuss the each management, inventory management procedure as it applies to NBC Plc.
1.6 DEFINITION OF TERMS
Some of these definitions are adopted from Kohler (1975), Parker (1984), Meigs and Meigs (1981) and other authors recognized in the Bibliography.
a. CAHS DISCOUNT: A reduction in the prince offered by the seller to the buyer as inducement to pay within a specific discount period.
b. CIMA- Chartered institute of management Accountants, formerly / CMA – institute of cost and management Accountants.
c. DISCOUNTING NOTES RECENIVABLE- Selling a note receivable prior to maturity date usually at a discount.
FACTORING- The sale by an enterprise of its debts to a factor who not only collects the debts but may also provide administrative and book-keeping services and credit insurance facilities. In deciding on whether to factor debts the enterprise must weigh the advantages of improved liquidity, less uncertainly and a smaller administrative load against the charges made by the factor.
FUND FLOW STATEMENT
This is a document or statement showing the sources of fund received and how the funds were disbursed during an accounting period. The statement shows movement in working capital.
GOAL CONGRUENCE- This is the co-ordinations of the personal and group goals of sub- ordinates and supervisor with those of the organization of which they are a part. For instance, the goals of an organization my include maximization of profits or share of the market; the goals of group, share values and mutual commitments and the goals of an individual, and aspiration to success.
PETTY CASH VOUCHER-This is a document prepared for cash payment made from the petty cash fund, it normally shows the date, amount of expenditure, purpose of payment, name and signature of the recipient and signature of the appropriate officer who authorized or approved the payment.
PETTY CASH FUND- This is a specified amount of cash set aside for minor cash payments for which writing of cheques is not required.
TECHNICAL INSOLVANCE- This is a situation where a debtor is unable to pay his debts as they mature. This is different from insolvency in the legal sense, which is defined as the point at which the liabilities of the firm is more than its assets (ie) it has negative net worth.
CONJIGENT LIABILITY- A potential liability, which either will develop into a full- fledged ability or will be eliminated by a future event.
CHAPTER TWO
2.0 REVIEW OF RELATED LITERATURE
2.1 DEFINITION OF WORKING CAPITAL
Working capital is simply defined as the excess of current assets over the current liabilities and provision (Net working capital), according to Anyaogu (199). The current assets are those cash and other assets that can be converted to cash within one accounting year such as debtor’s stock and term obligations, which normally fall due to payment within one accounting year such as creditors, bank overdraft, current taxation and dividend payable.
Also Milichamp (1989) and David (1983) defined working capital simply as current assets minus current liabilities. It has been established that, not all parts of a company’s capita outlay circulates or works in order for the business to make profit.
Only a part of the capital is applied in buying and selling activities of any business and it is this part of the capital used in marking profit in the business is what they refer to as working capital. This is consonance with CIMA’S (1982) definition, which says that working capital is the “capital available or conducting the day to day operations of a business” normally the excess of current assets over current liabilities. From the above definition, over current can be described as the difference between the inflow and outflows of funds.
COMPONENTS OF WORKING CAPITAL
The objective of management in working capital it has been stated earlier that working capital is an abstract concept, which can only be understood by looking at its components.
The components of working can be determined by looking at the following concepts of working capital.
a. Cross concept- This concepts of working capital invested in various components of current assets. The current assets comprise cash and other assets that can be easily converted to cash with one year such as debtor, stock and short term investment.
b. NET CONCEPT- This refers to the current assets (gross current) minus current liabilities., the net working capital concept enables a firm to easily ascertain the amount left for the operational requirement after its short-term obligations are meet.
Two concepts of working capital among others that is worthy to be mention here are:-
i. PERMANENT WORKING CAPITAL- This is the maximum investment (minimum amount of capital assets) requirement for the operations or conduct of the business of the firm. It serves as a butter or cushion particular during the dull season.
ii. SEASONAL WORKING CAPITAL- This comprised special working capital, which are required during specified seasons. It is a contingency or variation working capital set aside for unforeseen circumstance interest for this project is on the net concept which Been Ekedebe (1990) describes as the more liquid capital resources of money worth covering cash and bank balances plus debtors, stock term investments that could be readily cashed minus creditors and other indebtedness, as a sorest of negative resources. A negative working capital arises when the current liabilities exceed current assets.
1. THE CASH MANAGEMENT
The management of cash holds a central position in the efficient operation of any business. Cash used in the context here includes, Bank balances, cash and current bank balances should be kept to minimum level as they earn nothing for the company but care disrupted due to cash shortage..
Van Horne (1980) asserts that cash management involves managing the monies of the firm in order to attain maximum cash availability and maximum interest income on any idle fund”. During a period of rising interest rate, the opportunity cost of holding cash become expensive, hence organization strive at keeping cash to the barest minimum level done by the application of a scientific approach through the use of models like economic order Quantity (EOQ), stochastic and probability models.
However in deciding on the optimal level of cash holding, the main aim of an organization should projects that will yield higher returns.. The idea of reducing cash balance to the minimum is subject to constraints imposed by the motives of holding cash:-
i. TRAINSACTION MOTIVE
Here, cash is required for day to day servicing of the organizations operation (ie) cash required in the ordinary course of business.
ii. SPECULATIVE MOTIVE
Cash is required to take advantage if unexpected changes in security (ie) to exploit investment opportunity.
iii. PRECAUTIONARY MOTIVE
Here, cash is required to guide against cash flow interruptions as a butter or cushion to meet contingencies.
Management of cash centers on minimizing cash centres on minimizing cash balance subject to the three motives enumerated above while examining the management responsibilities relating to cash, Meigs and Meigs (1981) said that the efficient management of cash includes measures that will:-
a. Prevent losses from fraud and the fit.
b. Provide receipts, cash payments and cash balances.
c. Maintain a sufficient amount of cash at all times to make necessary payment plus a reasonable balance for emergencies.
d. Prevent Unnecessary large amount of cash from beings held idle in bank accounts, which produce no revenue.
There is every need for efficient cash management and this is borne out of one peculiarity about cash:-
i. The susceptibility of cash to theft than any other assets. For instance, a thief will prefer to steel cash of N10,000..00 to any item worth or value N20.000.00 may be for convenience.
ii. A large portion of the total transaction of a business involves the receipts or disbursement of cash.
iii. The difficulty in proving innocence when cash entrusted to one’s care is missing. My uncle, Mr. Goddy Nwosu is trying to emphasize on the need for proper moral conduct in a certain lecture within me, He said that there are two things , a man cannot easily convince and these are: When he is accused of taking a woman to bed and or taking money, I added that a responsible man is one who has not been placed in a position where he should be responsible.
These peculiarities make it very necessary that management must institute adequate internal cash control. According to meigs and meigs, the major steps in establishing materials control over cash include the following:-
a. Separate the function of handling cash from the maintenance of accounting records.
b. Establish separate and specific routines to be followed in the recording of cash transactions.
c. Require that all cash receipts, be deposited daily in the bank and that all significant cash payments be made by cheque cash payments should not be made directly from cash receipts on hand.
d. Require that the validity and amount of every expenditure be verified before payment is made.
e. Separate the functions of approving expenditure from the function of signing cheques.
To ensure that depositing cash receipts into the bank daily does not affect the day to day running of the business, a petty cash fund should be established of the care of payments for small purchases like stationeries, local traveling and entertainment et.
Generally, cash management is concerned with the control of resources of a business with emphasis on ensuring that each position at all times is adequate to offset maturing obligations.
An important of cash management is to monitor and control the source and rate of cash inflows and cash outflows. This can be achieved through the use of cash budget.
According to professor Ezejelue and Onwuchekwu (1991), “cash budget is the process of planning for all cash receipts and disbursement for a specified period”. PANDY I.M (1988) defines a cash budget as “a summary statement of a firm’s expected cash inflows.
By the above definitions, cash budget is seen as a detailed estimate of anticipated cash receipts and disbursement that are likely to be made during the period under review. It covers cash inflow, outflows and cash position of the company (opening and closing cash balances) for a given future time or period.
According to L.W. J. Owler and J.L. Brown (1978)“cash budget represents the cash receipts and payments, and the estimated cash balance for each month of the budget period.
MANAGEMENT OF DEBTORS
Debtors (Account Receivable) arise when goods and services are sold on credit. According to Kohler (1973), credit means the ability to buy or borrow in consideration for a promise to pay within a period sometimes loosely specified following delivery.
An organization gives credit to increase its sales, penetrate the market and or to dispose of available excess stock or to reasonable share of the market. Management of debtors is concerned with determine the optimum level of investment in Debtors.
The optimum Level of total debtor is determined, after considering a trade off between:-
a. Extending credit so as to increase sales and therefore
Profits.
b Interest and administrative cost of carrying debtors and
risk of bad doubtful debtors.
Generally, the Level of debtors to be maintained is influenced by external and internal factors;
* Norms of the industries.
* Type of customer
* Political consideration
* Economic conditions and degree of co-operation.
* Level of business exposition and the seasonal effects.
An internal factor includes policies set by the organization as it affects credit period. The starting point for effective Management of debtors is to stream Line credit and collection policies.
CREDIT POLICIES
A firm may adopt two esteem types of credit policies, viz;
Tight credit policy and loose credit policy.
a. Tight Credit policy; This is embarked upon when a company wants to improve its Liquidity position hence improve the working capital position and reduce bad debts, This surely affect sales, hence profitability is affected but will reduce risk.
b. Loss credit policy: This is embarked upon by a company who wants to increase sales or penetrate into a new market introduce a new introduce a new produce into the market or have a reasonable or fair share of the market or to sell off excessive stock to avoid obsolescence..
In this case, profitability objective may be achieved at the expense of rockiness.
COLLECTION POLICY
It is up a combination of collection procedure embarked up a company. It refers to the effectiveness or otherwise of the collection machinery of a company. These procedures include letters, phone clls, personal calls and legal actions (the last resort).
Spending on these procedures will reduce bad debts losses and reduce average collection period and therefore cost of investment in debtors.
However, this is dependent on the amount spent in achieving these benefits.
Importantly, the overall debt collection policy should be to ensure that the administrative costs and other incurrent cost in debt collection should not be in excess of the benefits from incurring these costs
REDUCING INVESTMENT IN DEBTORS
Manage can take advantage of a liberal credit policy to increase profitability through increased sales. This will however mean tying down much investment in debtors. Debtors can be reduced by obtaining immediate cash before collection date. This can be done through the following methods:
- Discounting notes received
- Fractioning of accounts receivable
- Assignment of account receivable
- Outright sales of account receivable
- Pledging of accounts receivable
2 INVENTORY (STOCK) MANAGEMENT
3 The keeping of inventory or stock is necessitated by the time-lag between production and consumption. According to Marx Graundrisee (1973), “production mediates consumption, it creates the latter material; without it, consumption would lack an object. He futher states that without comsumption, no production, since production would then be purposeless.” This analogy necessitates further the proper management of inventory or stock.
American usage of the world inventory is synonymous with the British usage of the word “stock”
The American Institutes of Certified Public Accountants (AICPA) defined inventory thus, “The term inventory is used to designate the aggregate of those items of tangible personal property which:-
1. Are held for sale in the ordinary course of business
2. Are held in the process of production for such sale
3. Are to be currently consumed I the production of goods or services to be available for sale.
According to the Nigeria Accounting Standard Board (NASB), stock includes those finished goods and livestock awaiting sale, working-in-progress, raw material and supplies to be consumed in the production of goods or the ordering of services.
From the above definition, we can conveniently classify inventory into:-
- Materials including supplies and spare parts
- Work-in-progress
- Finished goods
MANAGEMENT AND CONTROL OF INVENTORY
It is difficult to draw a lie between inventory, mamagement and control.
Management connections control and other management functions such as planning, organizing, etc. Kohler defines inventory control as “the control of merchandize, materials, goods in process, finished goods and supplies on hand by accounting and physical method. Inventory control is concerned with establishing and maintaining optimum levels of inventory and Horgren makes the assertion that the major goal of inventory control is to discover and maintain optimum level of investment in all types of inventories from raw materials and supplies to finished goods.
The objective of management in relationship with inventory is to establish and maintain optimum level of inventory.
The aim of management is to maximize profit by balancing investment cost in inventory against what is required for smooth operations.
In not-for-profit making organizations like government, hospitals, public utilities, universities, colleges of education and polytechnics, the police and the armed forces, the aim will be to minimize cost by balancing inventory investment against maximum benefit required from suchnot-for-profit making organizations.
In all cases, a good inventory policy must reflect a balance between carrying cost, ordering cost or not carrying enough (eg loss of sales). An optimum solution is that which minimizes the total costs of the two costs, which is the essence of management and control of inventory.
OPTIMUM LEVEL OF INVENTORY
Excessive inventory leads ti increase in carrying cost like cost of operating stores, risk of obsolescence, insurance cost, breakages and deterioration including contingencies cost.
Excessive inventory also incurs cost in terms of interest and capital tied I stores, because inventory is an investment of financial resources and the cost is measured by considering rate of return in the next best alternative investment or opportunity cost of the investments.
Savings could accrue to the company through bulk purchase. Such savings could be by way of quality discount or trade discount. However, this may not be adequate to off-set the carrying cost and opportunity cost of investing in large amount of inventory. Conversely, inadequate level of inventory may lead to disruptions or dislocations in the production process or loos on sales and consequently a loss of income. The question now is “what is the optimum level of inventory required?”
Morrison identified four considerations that influence the extent of holding stock. They include:
(a) Operational needs eg production and market consideration.
(b) Time required obtaining delivery.
(c) Availability of capital.
(d) Cost of storage.
It is the financial controller, who has to determine the optimum level of inventory. This is because all departments except the finance department would desire to develop inventory system that avoids stock out conditions at the expense of control in inventory level.
In order to achieve the major objective of inventory management (ie minimizing the total relevant costs) we have to consider the size order and the timing of such order, the timing can be determined once the usage rate and the ordinary quality (ie size of each order) has been determined.
The following has to be considered in setting the ordering quantities:-
- Estimate requirement and usage rate
- Available storage space
- Ordering cost (cost of not carrying enough).
- Ordering cost include cost of stationeries forgone
Quantity discount, extra cost of uneconomic production runs, contribution margin in lost sales, extra transportation cost, salaries paid to those engaged in preparing purchase orders and wages of those engaged in rendering and inspecting stores the risk of obsolescence, insurance cost, interest on tied up capital in the stores (ie desired rate of return on investment), deterioration and wastage.
ECONOMIC ORDER QUANTITY (EOD).
This refers to the optimum order quantity which will produce the most economic combination of ordering cost and carrying economical combination of ordering cost. To be more explicit, assuming the annual demand for stock in a company is fixed, the larger the order size, the lower the number of orders and hence the lower the ordering cost.
However, the carrying cost will be rising because this is dependent on overage stock which is rising as a result of large order size. On the other hand, the lower the order size the number of orders.
Hence, the higher the ordering cost, but the lower the average stock held, hence the lower the carrying cost.
Ordering cost and carrying cost move in opposite directions, so as to reduce total cost (ordering and which will produce the most economical combination of ordering and carrying cost in turn is the minimums acquisition costs.
The economic order quantity (EOQ) which was developed by F.W. Haris in 1915 can be determined graphically or by the use of an equation thus:
Q = Economic order quantity
D= Average Demand (Annual demand)
O = Cost per order
C = Carrying cost
The economic order quantity is also called the economic lot size.
INVENTORY CONTROL SYSTEM
Wixon R. et al (1970) identified four (4) factors to be considered in developing a sound inventory system. There are:-
a. The nature of the business
b. Specific objective of the inventory control system
c. Nature and extent of uncertainty likely to be recounted
Wixon further identified six factors to be considered in making an evaluation of an inventory system as:
i. Character of demand
ii. Lead time for the items
iii. Storage facilities
iv. Prince
v. Expanses involved in carrying
vi. Frequency of engineering changes or danger of obsolesce
The commonly used types of inventory control system are:-
a. Min- max system
b. Reservation system
c. Order cycling system
d. Two- bin system
e. Statistical control system
f. Budgetary control system
g. ABC classification and control method
The circumstances of the organization determine to a great extent the application of any or a combination of two or more control system.
Inventory control system is a pre- requisite or tool for decision making. It is not designed to solve problem rather, it is designed to highlight conditions so that inventory are inventory decision making can be based on facts and that events are not based on chance.
INTERNAL CONTROL
According to Cashin J.A. (1971), the concept of internal control as applied to inventories requires segregation of responsibilities for custody and accounting controls to prevent frauds involving a company’s inventory. This means the overall segregation of purchasing, receiving, storing and treasury and accounting functions.
Maintenance of reasonable and accurate accounting records and maintenance of appropriate system of internal, physical, administrative and accounting control are “prima face” for a good inventory policy.
Inventory management revolves in the fact that over investment or under investment in stock (inventory) is costly. A good manager strives at maintaining a good inventory level to determine the optimum level of investment in inventory.
CURRENT LIABILITIES
According to American institute of certified public accountant (A I C P A), current liabilities are obligations whose liquidation is reasonably expected to require used of existing resources properly classified as current Assets or the creation of other current liabilities. Current liabilities are created as a result of the unwillingness or inability of the business to meet quick maturing obligations. This means the unwillingness or inability of the business to pay immediately for goods and services received as a result of deferred revenue. The decision net to pay immediately may be taken where there is shortage of liquid fund or due to a desire to take advantage of a liberal credit facility provided by others. The company or business may decide to invest such money on short term investment for a higher yield or utilize such surplus cash in expansion projects.
Kieso D.K (1963) identified two categories of current liabilities based on the degree of uncertainty associated with each category, this: Determinable current liabilities and contingent current liabilities. Determinable currents liabilities can be precursory measured, the amount of cash required for payment and date are certain.
They includes:- Accounts payable, notes payable, dividend payable, other types are current maturities of long term liabilities. Contingent current liabilities are those whose determination is dependent upon the occurrence or non- occurrence of one or more future events to confirm either the amount or the payee or the date payable or its existence. This means the determination of one or more of these factors is dependent upon contingency, e.g pending law suits against a company.
Ezejelue and Onwuchekwa (1992) asserts that the objective of management in current liabilities is to keep it at a favourable level which current assets or liquid assets can off set on demand at any point in time. For the purpose of this research project, we are concerned with determinable current liabilities and we shall discuss only accounts payable (credits)
ACCOUNTS PAYBALE (CREDITORS)
Trade accounts payment or trade creditors are debts owed to others (creditors) for goods supplied and services purchased on open accounts. It arise because of the time lag between the receipts of goods or services and the payment for them.
According to meids (1981) assertion, creditors have claims against the assets of the business against the assets in general. The claims of the creditors are liabilities of the business and they have priority over the claims of owners. Creditors are entitled to be paid in full even if such payments should exhaust the assets of the business, leaving nothing for the owners.
However, Trade credits will have a cost where discount is offered for early payment and this is calculated using the formular.
The formula is:-
Cost of discount = d x 365
100-d CN-Co
Where
D= Discount offered
CN = Normal credit level
CO= Period of payment to enjoy discount.
The management objectives on creditors are made up of the followings:-
* To obtain satisfactory credits from the suppliers, subject to the cost of discount discussed above.
* To extent credit during periods of cash shortage, subject to the maintenance of good relationship with regular and important suppliers.
* To maintain good relation with regular and important suppliers.
Management of creditors further involves decision on the number of days credit is taken from the suppliers and the extent to which the credit is taken depends on the following factors:-
a. Annual discount rate
b. Opportunity cost of making early payment
c. Extra cost of processing such early payment
when the above factors / variables are expressed in financial terms, the net gain that will help management decide whether to take advantage of a discount, is arrived at by subtracting sum of opportunity cost and extra cost of processing (ie 2 & 3 above) from the annual discount rate (ie 1 above).
It therefore, follows that if the above does not give a net gain, the acceptance of the offer to discount is not advisable. So in this case, management should take full credit and pay on the last day of the credit period.
WORKING CAPITAL MANAGEMENT AND INTERGRATED APPROACH
Working capital management describes a category of management decision affecting specific types of current assets and current liabilities. It is the summation of management of the individual components of working capital, having in mind the optimum level of working capital required to increase the value of the firm or company.
The above description of working capital management is seen in the works of van Home (1980), that what is needed in working capital management is an understanding of current assets and current liabilities in the light of the overall value of the firm. To achieve a “goal congruence” in the management of working capital from an “integrated approach” the will help in maximizing the overall value of the firm. To achieve this also we must ask ourselves the following question:-
a. How much working capital can we hold at a particular point in time?
b. What proportion of the individual components of working capital should we finance held?
An integrated approach to working capital management centres, on the management of liquidity. Liquidity here, refers to the amount of cash and other assets that can be easily converted into cash and this has to do with the time required to convert the asset into cash, and the degree of certainty associated with the price that could be realized from the assets..
In managing co-operate liquidity the relationship between two accounting figures with a view to evaluate the financial position of the company having the accounting figures. The two categories of ratio relevant to working capital management are liquidity ratios and some activity (performance) ratios.
LIWUIDITY RATIOS
There ratios establish the relationship between current assets and current liabilities. They are measures of risk of insolvency.
i. Current ratios = Current Assets
current liabilities
The norm for this is 2:1 and depends on the type and nature of the industry. This shows the relationship between current assets and current liabilities and it is measure of the company’s short term solvency.
QIUCK (Acid) = Current Assets less stock
Test Ratio = Current liabilities
The norm is 1.1 depending on the type and nature of the industry.
ACTIVITY RATIO
The activity (performance) ratios relevant to working capital management are as follows:
SALES / WORKING CAPITAL
This is ratio of total sales volume to level of working capital and it shows how working capital is being used to generate sales.
Stock Turnover = Cost of goods sold
Average stock
This shows the rate of stock utilization and it indicates how effectively the company has excessive stock level, obsolete stock and low moving stock items.
Debtors Turnover = Total credit sales
Average debtors
This measures the liquidity of debtors account of debtors account indicates the umber of time debtors account are converted to cash during one year. A higher turnover is an evidence of proper management of debtors.
Average collection period = Days in year
Debtors Turnover
This measure the length of time a company had to wait, to collect its credit sales. The computation of these ratios in itself is meaningless unless they are compared with:-
a. Established Norm
b. Industry average (figures)
c Previous years figures
OPERATING CYCLE: This is our second approach to working capital management
OSIBODU C.O. (1990) repressed operating cycle or working capital cycle as a period of time.
a. Raw- materials stocks are obtained from suppliers.
b. Eventually, the trade creditors are paid and cash in therefore paid out.
c. Raw- materials are held in stock until they are issued of creditors (for labour and other expenses) may be incurred.
d. On completion of production, the finished goods are held in stock until sold, perhaps on credit.
e. Cash received eventually, when debt is collected..
Working capital (or operating) cycle is therefore the length of time between the payments for materials entering into stock (cash out) and the receipts from proceeds of sales (cash in) the objective of any goods management is to minimize the length of the operating cycle.
WORKING CAPITAL ANALYSIS
Based on the first two approaches (ratio analysis and operating cycle) we could analyze the fluctuation (increase or decrease) in working capital.
- An increase or decrease in working capital may causes:-
1. A change in level of activity or business volume of an organization and sales is normally used as a yard stick.
2. A change in operating cycle the proportion of change in working capital resulting from change (increase or decrease) in operating cycle is normally attributed to management of working capital ( inefficient or efficient management or working capital).
FUNDS FLOW STATEMENT
This is yet another means of managing working capital because the statements sources and application of funds (fund flow statement) is normally supported by a statements of movements in working capital. An increase in working capital will decrease in working capital will provide a source of data cash.
FINANCING OF WORKING CAPITAL
According to OBIBODU “Current Assets may be financed either by short or long term funds or a reasonable combination of the two. He further states that “prudent working capital management dictates that all short term funds be used to finance current assets. In addition to a proportion of long term funds. MAY BPP (1988) present a simple view of company financing using the diagram below?
ASSETS
FINANCED BY
Fixed (Long term) Assets
Long term funds
Current Assets
Current liabilities
(short term funds)
Short term funds include Bank credits, acceptance credits, trade credits, bill finance (ie, discounting of bill receivable), factoring.
Long term funds includes ordinary share capital, retained earnings, preference share capital, long term debts like mortgaged and unsecured debentures, loan stocks bank overdrafts constantly renewed yearly.
Decision on working capital financial should be based on liquidity and risk of insolvency. A company may be tempted to finance more of its current assets using current liabilities like creditors and tax payable because these have no interest cost.
This will however, affect the liquidity ratios, (ie) “current ratios, (ie) “current ratio” and “Quick ratio” it has been said earlier that liquidity ratios measures the risk of insolvency. Management should invest short term debts to finance current assets against the risk of insolvency. However, the decision on how working capital should be financed is likely to vary with management’s attitude towards risk.
2.2 BRIEF HISTORY OF THE NIGERIA BOTTLING COMPANY PLC
From the company’s profile, the NBC PLC was in cor-oporated in Nigeria in 1951. Its operation started in 1953 with a plant in Lagos as a branch. The NBC PLC belongs to leventis group of companies, and its business activities can be grouped into three divisions namely:
a. The bottling division whose responsibility is the bottling of company also produces squashes and Eva water.
b. The agricultural division which operates mainly through Sunvit agro industrial company at Agene bode in Edo Ekiti state, a large scale mechanized maize and rice farming organization including Agricultural seeds limited, at zaria which produces hybrid seeds.
c. The Allied industries Division which co-ordinates the following subsidiaries:-
i. Delta Glass Company Plc at Ugheli which manufactures Glas battles.
ii. Crown products limited, at Ijabu- Ode which manufactures Corks.
iii. Plastic products and packaging company at Benin Edo state which manufactures plastic trays.
This project covers only the activities of the Bottling Division. The Nigerian Bottling company (NBC) Plc is the largest producer of soft drinks in West African and it has more than(20) twenty Bottling plants (including Schweppes plant at Ikeja and Sapanda industries limited, Aba) and about (82) eighty- two deports located allover the (36) thirty- six states of the federation and the federal capital territory.
NBC Plc has a Franchise arrangement with the Coca- Cola company which in 1990 commissioned a manufacturing plant in Nigeria known as the Coca-cola ( Nigeria ) limited, CCN Ltd. Coca- Cola was first produced in GeOrgia, USA in 1898 and other Flavours of NBC- Fanta Orange, Fanta Ginger, Fanta Tonic, Club Soda, Krest and Schweppes are made up of a carefully standardized combination of Sugar, water and their individuals concentrates. Before the year 1990, these concentrates were imported from Nigeria by Coca-Cola ( Nigeria ) limited. This is the result of the de-regulated business Climate in Nigeria which has produced a new crop of entrepreneurs who have reaped and or are still reaping good results from their efforts and creative instincts or ingenuity.
Other major raw materials are crown- Corks, Carbondioxide (Co2) and the containers- Bottles and plastic trays. The Nigerian Bottling company Plc, established a plant and depot at Owerri in 1978 to boost the eastern supplies of their products. Since then, their distribution channels have assumed a commendable dimension particularly in reaching at the rural populace/ consumes in Imo state and environments. The location of its plant and depot has made possible contribution it its locality particularly in the areas of provision of employment opportunities and business entrepreneurs.
THE ORGANOGRAM OF THE NIGERIA BOTTLING COMPANY PLC
The organization structure of NBC, Plc is shown in Appendix (i). The structure is my understanding of NBC Plc, Organizational structure. Executives for Administration, Accounts, sales Technical, co-ordination etc in the third hierarchy are the Regional general managers who report directly to the general manger but they have functional relationship with the Divisional Executives. The plant managers are in – charge of the various plants and they report to their respective regional general manager. At the plant level, departmental managers (Accountants, Engineers, sales managers, Quality Assurance manager etc) report to the plant manager but they also have functional relationship with the Divisional Executives. After the Departmental managers who report to their departmental manager and have the rest of the staff as their subordinates. The organizational chart is seen in appendix (1) one.
CHAPTER THREE
3.0 RESEARCH METHODOLOGY
This research determines whether the various components of working capital are being managed to ensure their optimal levels are maintained. Managing each of the working capital components in isolation will create rather than solve problems. Hence, there is need for an integrated approach to management of working capital and this integrated approach will lead to the maintenance of optimum level of working capital capable of maximizing the level the firm.
3.1 RESEARCH METHOD AND DESIGN
The research method used here is the case study type and the design is a survey. Data was collected through the use of questionnaires, oral interview and findings based on the researcher’s good acquaintance or personal relationship with some managers and Accountants in NBC Plc.
SELECTION OF SUBJECTS
Here, we shall talk about the population, sampling and sampling technique used.
3.2 POPULATION
The population for this research is made up of division executives, plant managers, accountants and other senior management staff of NBC Plc.
These groups of people are in a position to understand the meaning of working capital and normally these people participate in formulation and / or implementation of working capital management policies of the company an they are ninety 990) in number.
3.3 SAMPLE SIZE AND ITS DETERMINATION
The sample was determined using this formular
N= N
I+N(e)2
Where:
N = Sample size (90)
N = Population
I = Is constant
E = error (15%)
N= 90
1+90(5%)2
N = 90
1+90(0.05)2
N= 90
1+90x (0.0025)
N = 90
1+ 0.25
N = 90
1+ 0.225
N = 90
1.225
N = 73.46938776
Since, human beings are not approximated, our sample size is 73.
3.4 THE SAMPLING TECHNIQUE USED
The sampling technique used is the stratified random sampling. The NBC Plc, has over 20 plants located at different parts of the country. For administrative convenience, the company is divided into (4) four regions. The population for this research is stratified into (5) five strata comprising the (4) four regions stratum hence we refer to the sampling techniques as “stratified random sampling”
The allocation of the sampling is as following:
Head office = 21
Northern regions = 13
Eastern region = 13
Western region = 13
Lagos = 13
Total 73
The reason for allocating more to head office is because there are more managers and accountant at the head office and also, the formularion and implementation of working capital policies takes place mostly at the head office.
3.5 INSTRUMENTATION FOR DATA COLLECTION
Primary and secondary data were collected for this research.
SECONDARY DATA SOURCES
The secondary data sources comprise information collected from:-
a. Books: Mainly financial management books.
b. Desk or library research on previous works on works on working capital management. Here, libraries of higher institution were used; articles and lectures by experts, journals, project work of others, students and unpublished work were collected.
c. NBC, Plc’s financial statements, in- house journal memos and management guide.
PRIMARY DATA
The instrument used for the collection of primary data include:-
a. A close ended questionnaire
b. Interviews.
QUESTIONNAIRE- Only one of set of questionnaires was administered to all the respondents. The questions are mainly close- ended with yes and no options. The questionnaires contain elements (questions) which are grouped in such component of working capital i.e questioned for cash management came first, followed by those for debtors, stock creditors and working generally respectively.
DATA COLLECTION
The first problem was that of convincing the respondents that this research was not instituted by management. I decided to use face- to face distribution and collection method at some of the regional offices, such as Oweri, Aba , Onitsha .
Questionnaires administered and distributed to both to both head offices and regional offices was not an easy task. I was helped out by an aunt who is a staff of NBC, plc plant at Head office, including my in- law who is an accountant and head of operations, NBC, Plc plant located at Kano . Also. The NBC, Plc salesman and distributor (truck salesman and distributors of coca- cola Nigeria (Ltd) gave me tremendous assistance in distributing and collecting the questionnaire.
The course of distributing and collecting took me to Lagos twice. The questionnaires were administered of management and accountants from various plant regions. The allocation of sampling size described in 3.4 (iii) to each stratum was strictly observed.
CHAPTER FOUR
4.0 DATA PRESENTATION AND ANALYSIS
4.1 DATA PRESENTATION
In this section, we shall present and analysis the data collected through questionnaire and use answers to key question. There are twenty- two questions in all, out of which question 3,4,5,6,7,8,12,13,17 and 19 will be analyzed critically using the percentage method, while the rest of the question would be analyzed using lesser methods, since they are not that critical. Twenty-two questionnaires were distributed to the people of interest and all the twenty- two were returned.
4.2 DATA ANALYSIS
The data collected was analyzed through the use of tables, and percentages. Test statistics was formulated to cover a component of working capital and from the group of questions that covered the components.
Answers to the key questions were first analyzed in tables showing the response option, observed frequency, expected frequency and percentage of responses. Most of these questions were related to the relevant, was used to test for reliability and validity and role of working capital management to the economy and to lend credence of this work. It is expedient to note that it is only the questionnaire and factors from oral interview are employed in the course of data collection.
A. TABLE 1: RESPONSE/ ANALYSIS OF QUESTION
N0: 1 Are all cash receipts evidenced by serially numbered receipts?
Response options
No of response
%
Yes
39
63
No
34
37
Total
73
100
This shows that out of 73 respondents, 39 said yes representing 63%, which means that 63% thinks that all cash receipts are evidenced by serially numbered receipts in the company. On the other hand, 34 respondents or 37% thinks that all cash receipts are not evidenced by serially numbered receipts.
The following notation will be used in subsequent tables:
R= Response option
N = Number of response
% = parentage of response to total
TABLE 2: RESPONSE / ANALYSIS OF QUESTION
N0: 2: Are all cash receipts banked intact, the following day?
Response options
No of response
%
Yes
50
70
No
23
30
Total
73
100
This shows that out of 73 respondents, 50 said yes representing 70%, which means that 70% think that all cash receipts banked are intact the following day on the other hand, 23 respondents or 30% think that all cash receipts banked are not intact the following day.
TABLE 3: RESPPONSE/ ANALYSIS OF QUESTION
N0:3: Dos the companies normal carry out bank reconciliations to agree the cash book balance and the bank statement balance?
Response options
No of response
%
Yes
69
87
No
4
13
Total
73
100
From the above table, 69 or 87 or 87% of the respondents said yes, hence they believe that the company normally carry out bank reconciliations to agree the cash book balance and the bank statement balance, while 4 or 13% of the respondents said no, hence they believe that the company does not normally carryout bank reconciliations to agree the cash book balance and the bank statement balance.
TABLE 4: RESPONSE/ ANALYSIS OF QUESTION
N0: 4 Does the companies have major sources of cash in flow?
Response options
No of response
%
Yes
38
53
No
35
47
Total
73
100
This shows that out of 73 respondents 38 said yes representing 53% which means that 53% thinks that the company does have source of cash inflow. On the other hand, 35 said no representing 47% hence they believe that the company does not have major sources of cash inflow.
TABLE 5: RESPONSE/ ANALYSIS OF QUESTION
N0:5 Does you think that the management of cash in the company is effective?
Response options
No of response
%
Yes
65
73
No
8
27
Total
73
100
This shows that out of 73 respondents, 65 said yes representing 73%, which means that 73% thinks that management of cash in the company has been effective. On the other hand, 8 respondents or 27% thinks that management of cash has not been effective.
TABLE 6: RESPONSE / ANALYSIS OF QUESTION
N0:6 Does the company invest excess cash on short term convertible marketable securities.
Response options
No of response
%
Yes
60
67
No
13
33
Total
73
100
Table six shows that 60 or 67% of 73 respondents answered yes hence they agree that the company does invest excess cash on short term convertible marketable securities. 13 or 33% of the respondents think otherwise hence they answered no to the question.
TABLE 7: RESPONSE/ ANALYSIS OF QUESTION
N0:7 Does the company have specific securities they often deal with?
Response options
No of response
%
Yes
36. 5
53
No
36.5
47
Total
73
100
Table seven shows an equilibrium in response 36.5 or 53% out of 73 respondents answered yes hence they agree that the company does have specific securities they often deal with. The same percentage said no, hence they disagree.
TABLE 8: RESPONSE/ ANALYSIS OF QUESTION
NO:8 Does company give credit?
Response options
No of response
%
Yes
72
97
No
1
3
Total
73
100
This table shows that 72 or 97% out of 73 respondents answered yes hence they agree that the company does give credit. While just or out of 73 respondents said no hence they said the company does not give credit..
TABLE 9: RESPONSE/ ANALYSIS OF QUESTION
N0:9 If yes, are there criteria’s considers in fixing credit standards and credit units?
Response options
No of response
%
Yes
73
100
No
0
0
Total
73
100
The table shows that 73 or 100% out of 73 respondents answered yes and nor respondents answered no, hence it is clear that there are criteria’s the company considers in fixing credit standards and credit limits.
TABLE 10: RESPONSE/ANALYSIS OF QUESTION
N010: Has the credit and collection policy adopted by the company been effective?
Response options
No of response
%
Yes
68
83
No
5
17
Total
73
100
From the above table, 68 respondents representing 83% said yes hence they believe that the credit and collection policy adopted by the company is effective 5 or 17% respondents said no, hence they believe that the credit and collection policy of the company is not effective.
TABLE 11: RESPONSE/ ANALYSIS OF QUESTION
NO11: Are age analysis of debtors frequently prepared and provision for bad debts made?
Response options
No of response
%
Yes
39
57
No
34
43
Total
73
100
This table shows that 39 57% out of 73 respondents said yes meaning that age analysis of debtors are frequently prepared and provision for bad debts are made. 34 or 43% out of the respondents said no, hence they say that the age analysis of debtors are not frequently prepared and that provisions for bad debts are not made.
TABLE 12: RESPONSE/ ANALYSIS OF QUESTION
NO:12 Does the company pay adequate attention to inventory (stock) management and control?
Response options
No of response
%
Yes
66
77
No
7
20
Total
73
100
This table shows that 66 or 75% out of 73 respondents said yes, they agree that the company does pay adequate attention to inventory (stock) management and control 7 or 23% out of the respondents said no, they do not agree with the other respondents.
TABLE 13: RESPONSE / ANALYSIS OF QUESTION
N0:13 Does the management have particular inventory control system it uses.
Response options
No of response
%
Yes
23
40
No
50
60
Total
73
100
This table shows that 23 or 40% out of 73 respondents said yes, hence they believe that the management has a particular inventory control system it uses. On the other hand 50 respondents representing 60% of the total respondents said no, meaning that the management does not have a particular inventory control system it uses.
TABLE 14: RESPONSE / ANALYSIS OF QUESTION
N0:14: Would you say that the inventory control system used by management is adequate?
Response options
No of response
%
Yes
65
77
No
8
23
Total
73
100
Table 14 shows that 65 respondents or 77% of the 73 respondents said yes. That is, agree that inventory control system used by management is not adequate.
TABLE 15: RESPONSE/ ANALYSIS OF QUESTION
N0:15 Are stock records regularly reviewed for obsolete/ damaged / slow moving or otherwise defective stock?
Response options
No of response
%
Yes
72
97
No
1
3
Total
73
100
Table 15 above shows that 72 or 97% out of the 73 respondents said yes, i.e they agree that stock and records are regularly reviewed for obsolete / damaged/ slow moving or otherwise defective stock/ or 3% of the respondents said no, hence they believe that records are not regularly reviewed for obsolete / damaged/ slow involving or otherwise defective stock.
TABLE 16: RESPONSE/ ANALYSIS OF QUESTION
N0:16 If yes correctness of the stock records checked physically, either by annual/ monthly stock taking or by continuous stock-taking procedure?
Response options
No of response
%
Yes
64
70
No
9
30
Total
73
100
The table above shows that 64 or 70% out of 73 respondents said yes, i.e they agree that the correctness of the stock records are checked physically, either by annual/ monthly stock- taking or by continuous stock- taking procedure 9 or 30% out of the respondents think otherwise ie the correctness of the stock records are not checked physically, either by annual / monthly stock- taking or by continuous stock- taking procedure.
TABLE 17: RESPONSE/ ANALYSIS OF QUESATION
N0:17 Does the company purchase materials on credit?
Response options
No of response
%
Yes
65
73
No
8
27
Total
73
100
Table shows that 50 persons representing 60% of the total respondents said yes i.e they agree that the company purchase materials on credit. While 23 or 40% of the respondents said no meaning they believe that the company does not purchase materials on credit?
TABLE 18: RESPONSE / ANALYSIS OF QUESTION
N0:18 If yes, are approved suppliers list maintained and regularly reviewed?
Response options
No of response
%
Yes
50
60
No
23
40
Total
73
100
Table 17 was 50 respondents said yes / meaning that 50 people will still answer the question in the above table, 50 or 60% of the respondents said that suppliers list are approved and maintained and regularly reviewed. The 23 0r 40% is just a representation of respondents who said no to question 17.
TABLE 19: RESPONSE/ ANALYSIS OF QUESTION
NO: 19 Does the company take full advantage of the maximum credit period offered by suppliers?
Response options
No of response
%
Yes
49
60
No
24
40
Total
73
100
This shows that 49 or 60% of 23 respondents said yes while 24 or 40% said no, which means that 60% believe the company takes full advantage of the maximum credit period offered by suppliers while 40 believe that company does not take full advantage of maximum credit period offered by suppliers.
TABLE 20: RESPONSE/ ANALYSIS OF QUESTION
NO:20 Are there departments in the company that are responsible for the management of working capital?
Response options
No of response
%
Yes
60
67
No
13
33
Total
73
100
The table shows that 60 out of 73 respondents said yes while 13 said no, which means that 67% believe the there are departments in the company responsible for the management of working capital while 33% believe that there are departments in the company responsible for the management of working capital.
TABLE 21: RESPONSE/ ANALYSIS OF QUESTION
N0: 21 Are there ratios employed by the company in appraising the efficiency of working capital management?
Response options
No of response
%
Yes
71
93
No
2
7
Total
73
100
The table shows that 71 out of 73 respondents said yes and only 2 said no, meaning that 93% believe that there are ratios employed by the company in appraising the efficiency of working capital management while, 7% agree that there are no ratios employed by the company in appraising the efficiency of working capital management.
TABLE 22: RESPONSE/ ANALYSIS OF QUESTION
N0:22 Would you say that effective and efficient management of working capital has contributed to the successful operations of NBC, PLC?
Response options
No of response
%
Yes
67
80
No
6
20
Total
73
100
Table 5 shows that 67 out of 73 respondents answered yes hence they agree that effective and efficient management of working capital is a necessary instrument for the successful operations of NBC, while 6 or 20% think otherwise, hence they said no, believing that effective and efficient management of working capital effective and efficient management of working capital is not a necessary instrument for the successful operations of NBC, Plc .
CHAPTER FIVE
5.0 SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
5.1 SUMMARY OF FINDINGS
The fact of is that credit sales is extended to less than 10% of the total customers. The sales for NBC Plc products is often done on cash carry basic, only prestigious outlets are give credit sales. The credit and collection policy of NBC is effective because:-
1. The prestigious outlets are reputable customers who are not likely to default in paying their debts.
2. Though, they are build buyers, they are few in member hence they can be easily monitored.
CASH MANAGEMENT- The researcher fund out that the secret behind this is that cash movement is monitor by finance department or the head office on a weekly basis.. Based on the information received from the plant, the finance department will know how much to draw from the accounts of the plants. So the cash management instruments discussed in chapter two are applied by the finance department at the head office under the divisional executive.
INVENTORY MANAGEMENT- In chapter two we establish that good inventory policy should strive to determine the optimum investment inventory that minimizes total cost of inventory carrying out and ordering cost. We concludes that inventory control system used by NBC Plc is adequate. Our investigation shows that major raw materials, contains and spare parts are controlled centrally by head office who determine the maximum to be sent to each plant. The real inventory management and control is done at the head office where statistical models or mathematical techniques are used to determine optimum level of inventory.
MANAGEMENT OF CREDITROS- We concluded that the management of NBC Plc does not take full advantage of maximum credit period offered by suppliers.
This is because the 73 days policy adopted by the company in paying their creditors is not adhered to by the managers. It is easier to adhere at the head office where bulk purchases are made from recognized suppliers.
And also because the companies credit policy do not pay attention to creditors with longer or shorter credit period offer.
WORKING CAPITAL MANAGEMENT- We concluded that effective and efficient management of working capital is a necessary instrument for the successful operations of NBC Plc.
In chapter 2, we looked at the integrated approach to working capital management. We agreed that we may have a sort of “Dysfunctional decision making” if we in isolation emphasize on the management of each of the components of working capital. To achieve a “Goal congruence” we agree with the assertion of van home that what is needed is an understanding of the components of working capital of the firm and that an integrated approach to working capital be achieve through the finance department.
5.2 CONCLUSION
From the above discussion and the analysis in chapter 4, we can conclude as follows:-
a. That the management of cash in NBC Plc has been effective.
b. That the credit and collection policy adopted by NBC is effective.
c. That inventory control system used by NBC Plc is adequate.
d. There is need to case with suppliers, and top management should educate the managers and accountants on the need to take full advantage of the maximum credit period offered by the suppliers and not just to adhere with 73 days credit policy of NBC Plc.
e. That there exist “goal congruence” in the management of working capital of NBC Plc. This “goal congruence” is achieved through the finance department at the head office. This department applies an “integrated approach” to the management of working capital.
f. Finally, based on the above conclusion, we can deduce that effective and efficient management of working capital is a necessary instrument for the successful operations or business enterprises in general.
5.3 RECOMMENDATION
Following the findings of this study and the analysis of the data, it would be necessary to make the following recommendations not necessarily to NBC Plc only but to all companies of the size NBC Plc in particular and to all business enterprise in general.
i. For a company as big as NBC Plc and with branches all over the country, the use of computers is highly recommended for effective management of working capital. The use of radio messages and weekly returns to transfer financial information to finance department at the head office could delay decision making and/ or direct the information to the wrong person. Also, it could lead to distortion of information. The use of established computer department at the head office and some regional offices with divisional executive management information system (MIS) as the head of the department is not sufficient. Computer department should establish at all levels including plants and depots.
ii. As the business grows and our business environment gets more matured like those of the advanced countries, more people and organizations will ask for credit facility. This means that the proportion of credit sales of NBC Plc will increase. There is no need to establish a formal credit customers may embarrass the company as the credit customers grow in number and the proportion of the credit sales increase.
iii. Centralization of stock and stock level decisions is good but we recommend a little modification. We recommend that stock be centralized in regions. i.e each should have its own central store. This if properly managed will reduce transportation cost and immediate requirements of plants will be met.
However, care must be taken not to over- stock in these regional areas.
iv. There is need to establish registered and reputable suppliers at the head office, regional offices and plant levels. These suppliers should be briefed that the company requires at least a 73 days credit period from all its suppliers.
INTRDOUCTORY LETTER
Department of Business
Administration and Management
Federal Polytechnic Nekede,
Owerri,
P.M.B. 1036, Owerri,
Imo state.
Dear Sir/ Madam,
QUESTIONNAIRE
The researcher is a National Diploma student of the Department of Business Administration and Management of the Federal Polytechnic Nekede Carrying out a research on the topic. The information sought in this questionnaire is purely for academic purpose and when given will be treated in most confidence, also assuring the protection of your business identify. I shall grateful if you will kingly answer the attached questionnaire as objective as possible. The questions asked are expected to help me arrive at a reasonable conclusion with recommendations, which will be beneficial to your organization.
Thanks for your anticipate co-operation.
Yours faithfully,
ANORUE ONYEBUCHI .G.
QUESTIONNAIRE
Ö
INTRODUCTION
Please tick against the option you choose and give correct answers:
SECTION A
PERSONAL DATA
1. Sex: Female Male
2. Age: 25-35 35- 45 50-60
3. Marital status: sign Married
4. Department……………………………………………………………………….
5. Qualifications…………………………………………………………………….
6. Occupation / position……………………………………………………….
SECTION B
1. Are all cash receipts evidenced by serially numbered receipts? Yes No
2. Are all cash receipts banked intact the following day?
Yes No
3. Does the company normally carry out bank reconciliations to agree the cash book balance and the bank statement balance? Yes N0
4. Does the company have major sources of cash inflow?
Yes N0
5. Do you think that the management of cash in the company is effective? Yes No
6.. Does the company invest excess cash short-term convertible marketable securities? Yes No
7. Does the company have specific securities they often deal with? Yes No
8. Does the company give credit? Yes No
9. If yes, are there criteria’s the company consider in fixing credit standards and credit limit? Yes No
10. Has the credit and collection policy adopted by the company been effective? Yes No
11. Are age analysis of debtors frequently prepared and provision for bad debts made? Yes No
12. Does the company pay adequate attention to inventory (stock) management and control? Yes No
13. Does the management have a particular inventory control system it uses? Yes No
14. Would you say that the inventory control system by management is adequate? Yes No
15. Are stocks records regularly reviewed for obsolete/ damaged/ show moving or otherwise defective stock? Yes No
16. If yes, is correctness of the stock records checked physical, either by annual / monthly stock-taking or by continuous stock- taking procedure? Yes No
17. Does the company purchase materials on credit?
Yes No
18 If yes, are approved suppliers list maintained and regularly reviewed? Yes No
19. Does the company take full advantage of the maximum credit period offered by suppliers? Yes No
20. Are there department in the company that are responsible for the management of working capital?
Yes No
21. Would you say that effective and efficient management of working capital has contributed to the successful operations of NBC Plc? Yes No
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