CHAPTER ONE
INTRODUCTION
INTRODUCTION
1.1 Background
to the Study
The Nigerian Economy is faced with
several factors which could delay the speed of having a huge return on the
resources employed by the petroleum marketing companies. The factors include;
unstable and even volatile political and economic environment in Nigeria, lack
of appropriate materials, corruption and mismanagement or opaque
accountability, lack of adequate finance, insufficient pertinent technical
expertise and unhelpful multi-national companies attitude are impediment that
should be removed, an improved educational infrastructure is needed, lack of
stimulating government regulatory framework and deficient infrastructural
facilities to mention few. As a result, however, proper initiative and capital
(resource) management is required. It is worthy to note that out of every
resource that an organization has, working capital is the most important or the
basic issues to be discussed. Working Capital is a vital element in any
organizational setting that requires logical attention, proper planning and
management. As resources available to organizations are scarce, it is believed
that the management of an organization’s working capital has an important role
to play in the achievement of profitability and overall performance of such an
entity. This implies that a firm’s liquidity does to a large extent determine
its profitability. However, liquidity and profitability are not the same but,
are the core objectives of a firm. Increase in company profitability by
reducing the liquidity can bring some serious problems as goals cannot be
ignored at any cost; if goal of maximizing the profit is ignored , survival is
not possible for a longer time and if liquidity objective is ignored, it result
to insolvency or bankruptcy. Efficient utilization of the firm’s resources leads
to increased profitability and reduction in common risk and improves the firm’s
value (OWOLABI and ALU, 2012).
Farounbi (2005)
clearly states that the amount of capital, which is readily available to an
organization, is known as working capital. This implies that the difference
between resources in cash or readily convertible cash (current assets) and the
organizational commitments for which cash will soon be required (current
liabilities) is referred to as Working Capital Management.
It also involves making appropriate
investments in cash, marketable securities, receivables, and inventories as
well as the level and mix of short-term financing. In essence working capital
management seeks to maintain an optimum balance of each working capital
component thereby ensuring that firms operate with sufficient fund (cash flows)
that will service their long term debt and satisfy both maturing short term
obligation and upcoming operational expenses. This, therefore, makes it more
glaring that working capital management has an important role to play in a
company’s drive to achieve greater profitability. One can then say that
decisions relating to working capital management must not be taken for granted (OWOLABI
and ALU, 2012).
Hence, Petroleum Marketing Companies in
Nigeria should try as much as possible to meet up with this goal so as to avoid
being caught up in the trap of ineffective management of working capital
components.
1.2 Statement
of the Problem
Most petroleum marketing companies in
Nigeria needs sufficient resources to keep it going and ensures that such
resources are maximally utilized to enhance its profitability and overall
performance.
Large number of business failures has
been blamed on the inability of the financial manager to plan and control the
working capital of their respective firms. They also lack self-confidence and
control.
In most part of the world, accounting
officers and other related officers including investors focus more on the
quantum of profit declared by an organization. This today has formed the basis
for which strong companies are being determined. This may be misleading because
a company can be endowed with assets and profitability but short of liquidity
if its assets cannot readily be converted into cash. As such, there will be
shortage of cash available for the firm’s utilization as at when due. Such an
organization may run into debts that could affect its performance in the long
run because the smooth running of operations of the organization comes to a
sudden halt and it will not be able to finance its obligations as at when due.
These problems necessitate this
study, how can a proper management of working capital enhance successful
operation of the company with a view to achieving the desired goals of the
company?
1.3 Objective
of the Study
This study primarily intends to
determine the effect of working capital management on the profitability of
listed petroleum marketing companies in Nigeria. Specifically, it is aim to
achieve the following objectives;
1. To identify the effect of working capital
management on the profitability of
listed petroleum marketing companies in Nigeria
2. To determine the relationship between working
capital management and profitability.
3. To identify the determinant of Working
Capital and Cash Management.
1.4 Research
Questions
The study intends to answer the
following research questions.
1. What
is the effect of working capital management on the profitability
of
listed petroleum marketing companies in Nigeria.
2. What are the relationship between working
capital management and profitability?
3. What are the determinant of Working
Capital and Cash Management?
1.5 Research
Hypothesis
For the purpose of this study, the
hypothesis below will be tested in the course of the study:
H01: Working capital management has no
significant effect on the profitability of petroleum marketing companies in
Nigeria.
Ho2: There is no relationship between working capital
management and profitability.
Ho3: There is no relationship between determinant
of Working Capital and Cash Management.
1.6 Significance
of the Study
The significance of this work is
multi-dimensional. This is because; the state of the financial health of a firm
is of special interest to diverse group of interested party and shareholders in
business.
The study, when completed is expected
to serve as valuable contribution to the body of knowledge and a source of useful
reference for future research.
The study when completed should be of
immense benefit to managers of business organization in the following areas;
It will assist business managers in
appreciating the usefulness of an efficient working capital policy.
It will also help managers in
choosing proper working capital management strategies that would improve their
efficiency.
It will enable managers to know how
the efficiency and profitability of a business can be improved through better
working capital management.
To analyze the various component of
identified petroleum marketing companies’ working capital in Nigeria and
ability to contribute to the profit of the business.
i.
To create awareness of the importance of
effective working capital management.
ii.
To reduce the unfavorable gap between
the success and failures in the business circle as regards profitability and
liquidity.
iii.
To make viable recommendations based on
findings of the study.
In view of these, this study intends
to examine the effect of working capital management on the profitability of
petroleum marketing companies in Nigeria.
1.7 Scope
of the Study
This study will cover the effect of
working capital management on the profitability of petroleum marketing
companies with particular reference to the 5 listed petroleum marketing
companies on the Nigeria Stock Exchange (NSE) covering a period of five (5)
years from 2009 – 2013 (i.e Total, MRS, Mobile, Oando & Forte oil).
It is not the objective of the
research however, to go into any other accounting policies except working
capital management in petroleum marketing companies.
Thereby, the scope is restricted to
working capital management on the profitability of the companies.
1.8 Definition
of Key Terms
Working Capital Management: ensures a company has sufficient cash flow in order to meet
its short-term debt obligations and operating expenses.
Cash Flow: a
cash flow statement is a series of cash receipts and payment over the life of
an investment.
Liquidity: is
the amount of capital that is available for investment and spending.
Profitability:
is the state or condition of yielding a financial profit or gain.
Current Assets:
current assets are those resources of a firm which are either held in form of
cash or are expected to be converted into cash within an accounting period of
the business.
Current Liabilities: current liabilities are debts
payable within an accounting period.
T-Test: is a
tool used by individuals to conduct a qualitative analysis of information in a
company’s financial statements.
1.9 Plan of the study
This study is organized into five
chapters. Chapter one is the introduction which gives the background of the
study. It also give the statement of the problem, Research question, objective
of the study, significant of the study, scope of the study and plan of the
study, the chapter in addition gives the definition of key terms. Chapter two
presents relevant, comprehensive and related literature review that was done to
familiarize oneself with previous work already done in this particular research
field. Chapter three, deals with research methodology. It deals with the
introduction of the chapter, research method used, research population, sample
and sampling procedures, instrument used in administering and method of data
collection and presentation. Chapter four, deals with data presentation
analysis and interpretation, introduction of the chapter, presentation of data,
analysis of data, major findings and summary of the chapter. Finally, chapter
five contains summary, recommendation and conclusion based on finding of the
study.