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EFFECT OF WORKING CAPITAL ON THE OPERATION OF BUSINESS ORGANIZATION

ABSTRACT

This research work is to know the Effect of working capital on the operation of Business organization (a case study of 7up bottling company Nig. Plc).In most of the business organizations today, the management have not seriously looked into the effect of working capital on the operation of their business and this has been adversely affecting the growth, stability and profitability of the business within their years of operation. In pursuant to the solution to the problem above, the study has the following objectives: (i) To find out the reasons for retardation in business operation. (ii) To make a careful consideration of the necessary skills required of the organization’s staff that are responsible for working capital management. (iii) To appraise the reasons for inadequate cash and its effect on the business of seven up bottling company Plc. Questionnaire were drafted and distributed to elicit response from the prospective respondents, whose functions were basically related to financial matters, using a case study approach and limiting it to 7up bottling company plant in Ijora, Lagos State.  Also, the use of tables and percentage were adopted for proper interpretation of data and findings were made.  The main findings of this research work are that working capital is essential for the smooth day-to-day running of the business organization and therefore requires high level of skills in its management. The conclusion drawn from the findings were that management of working capital is a veritable means of ensuring the continuity of a business as well as the maximization of shareholders’ wealth. In the light of the preceding findings, the following recommendations were made.(i) Working capital requirement should be pre-determined. A good technique used in doing so is…. Cash forecasting (cash budgeting). (ii)  Also, sources and application of funds statements could be used to check the state of working capital. It is important to keep adequate working capital within perspective by calculating the cash operating cycle periodically. Adjustment may be required where deviation occurs.

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

The basic aim of every business organization is to maximize profit and to maintain its liquidity ratio which are the paste for continuity and a hallmark for growth in business operation. If a company inefficiently manages its working capital so that there may be les stock, debtors and cash, and very few creditors, there will be less investment by the company in current assets that is there will be insufficient working capital thereby reducing profitability potentials of the company. Infact, the lesser the current assets to current liabilities of a company, the more liquidation the company is prone or exposed to in the long run. Possibly the company may either be under capitalized or under trading.

The opposite situation arises when the company is limited to the area of financing its current activities which can quickly yield more profit. Essentially, having adequate working capital stand in business organization is a pivotal point of market smooth flow of performance and is also an enhancement to stability with other associated benefits such as growth in operation and profitability. However, inadequate working capital leads to recession in the business activities and retardation of growth. This can be externally dangerous in the long run. From long accounting practice, experiences and research, and many techniques have been developed individually through which all difficulties can be removed or at least reduced.

Business organizations have numerous objectives which they pursue and are stated in financial terms. These objectives provide a set of parameters for measuring financial decision. While business organization strive to achieve their objectives by obtaining funds from various sources and investing them in various assets, the most important decision which management would make include determining those sources of fund and investment that will most effectively promote the achievement of the organization’s objective. Finance managers are the best to make those decisions. Working capital is an aspect which this study is to address adequately, this is by default of the financial management mainly because of insufficient fund or poor control or allocation of resources.

Working capital is the difference between the current assets of a company and current liability. This represents the sum mainly available to the company to meet its daily obligations. However, the gross concept shows the total debtors, stocks, prepayment, cash and bank balance and the current assets such as invention and investment outside. Working capital is very important in business life. Its acquisition and utilization requires some level of skills in this area. Simply put, it is the life wire of a business organization for its survival and growth. It is for this reason that proper control of working capital is imperative. Items of working capital stock in trade, debtors, cash and bank balances (including items of near cash and cash such as short term investment) and prepayments, the differences between these items and the sum of trade creditors, accrued debt and short term credits is known to be working capital.

Management of working capital is a process of critical analysis and valuation of the acquisition, retention and use of working capital to optimize its investment in current asset. Effective control or management of working capital will determine to what greater extent the level of stability, liquidity growth and reward of any business organization. This responsibility is on the financial management and this is the reason for managing working capital so as to avoid the associated cost of having inadequate working capital that may result into:

i.   Disruption of production.

ii.  Contribution to margin on loss sales

iii. Loss of customers’ goodwill

iv. High interest rate on borrowings for financing of the business on daily basis. These are mostly relevant in manufacturing business organizations, efforts should be adequately taken in order to avoid its occurrence in any business organization.                                                              

1.2   STATEMENT OF THE PROBLEM

In most of the business organization today, the management has not seriously looked into the effect of working capital on the operation of their business and this has been adversely affecting the growth, stability and profitability of the business within their years of operation.

1.3   OBJECTIVES OF THE STUDY

In pursuant to the solution to the problem above, the study has the following objectives:

(i)  To find out the reasons for retardation in business operations of 7up bottling company  plc,

(ii)  To make a careful consideration of the necessary skills required of the organization’s staff who are responsible for working capital management;

(iii) To appraise the reasons for inadequate cash and its effect on the business of 7up bottling company plc.    

1.4   RESEARCH QUESTION

In the course of the study, the researcher was posed with the following question which were begging for answers and if properly answered would profer solution to the problems.

The research questions are as follows:

(i)  What are the effects of retardation in the business operation of 7up bottling company plc?

(ii) What are the necessary skills of the staff of 7up bottling company saddled with the responsibility of the management of working capital?

(iii) How would the reasons for inadequate cash and its effect on the business of 7up bottling company plc be appraised?

(iv)  What do you do to optimize the use of cash surplus to the required minimum?

1.5    RESEARCH HYPOTHESIS

In the course of the research work the researcher was able to formulate the following hypothesis after careful consideration of work that has direct or indirect relationship with the subject matter.

The hypothesis for the research work are as follows.

Ho: Working capital does not have effect on the retardation of business operation.

H1:  Working capital has effect on the retardation of business operations.

Ho:  The necessary skills of the staff of 7up bottling company saddled with the responsibility of working capital management are not to be carefully considered.

H1: necessary skills of the staff of 7up bottling company saddled with the responsibility of working capital management are to be carefully considered.

Ho: The reasons for inadequate cash and its effect on the business of 7up bottling company should not be appraised.

H1: The reasons for inadequate cash and its effects on the business of 7up bottling company should be appraised.

Ho: Surplus cash should not be used to the minimum level.

H1: Surplus cash should be used to the minimum level.        

1.6   SIGNIFICANCE OF THE STUDY

The benefits arising from the research work include the following:

(i) Supply of modalities for improving operational growth in business organizations.

(ii) Identification of different sources of short term finance which can be obtained to support the available working capital.

(iii) It will be very useful to the employers of labour;

(iv) The students of higher institution especially those seeking degree in business administration will also benefits from it for their research work.

(v)  The general public will also benefits immensely from this research work.

1.7   SCOPE OF THE STUDY

The study evaluates the effect of working capital in the overall performance of 7up bottling company plc Nigeria. Being a bottling company in Nigeria and beyond.   

1.8   LIMITATION OF THE STUDY

In the process of carrying out this study, certain obstacles were encountered. Time constituted a large constraint, this is because the time available was too short and had to be shared between this study and other pressing issues. Also, finance was another obstacle. The study required sufficient amount of money to meet the research work. In addition to this was the problem of distance and transportation because getting transport to some places was difficult and as a result of that the study has been restricted to those companies that were accessible to this research.

Furthermore, it was discovered that there was no definite organizational chart for most of the companies so as to know who is responsible for the management of working capital, due to this problem, people are accustomed to concealing information especially when they think it is personal or highly secretive therefore, obtaining response from the respondents was so difficult that the study is strictly limited to the available information.         

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