WORKING CAPITAL MANAGEMENT AS A GUARD TO EFFICIENT MANAGEMENT

CHAPTER ONE

1.0         INTRODUCTION

Working capital is defined by ………… (…..) as in current asset less the totality of the firm’s current liabilities. The current assets of a firm include: Inventory, account receivable, short-term marketable securities and cash while the current liabilities include items such as account payable, notes payable, accounts, customers deposits (i.e. prepayments), differed taxes, and other short term debt obligations.Working capital management deals with the management of investment in current asset and in current liabilities that is, management of current asset level and arrangement of the short term credit to finance the current assets investments. The management of working capital involves the determination of optimum level of working capital to keep monitoring and controlling the level of individual component of working capital to ensure that the optimum level is not exceeding, and provision of fund to finance current assets.

Management of working capital is also all about the provision of sufficient current assets that will be able to sustain the normal process of acquisition of raw materials and supplies, turning out the finished product and collection of payment. In some organization the estimated provision of working capital or current asset are not adequate, in such a case, other measures must be opened to provide the short fund, or the business will fall.

However, in practice, some organization separate working capital management from other aspects of financial management. I observed that it should not  be so. Therefore I wrote this conceptually in such a way that it will give good understanding to various components of working capital, management from the more fundamental decisions of investment.

Observing the historical background of Modotel, On 27th April 1978 the Modotel  Nigeria ltd was registered as a private liability company with the name Valid Hotel ltd. the Authorized share capital at the start was 10,000 ordinary share of N1each. Its operation started in 1986 September to be precise i.e. eight years after the registration.

On commencement, the Hotel has been maintaining an average capital of seventy – five percent (75%) in its room occupancy. It is made up to twenty eight double room, thirty – two bed rooms and three suits contained in a five storey building. The staff capacity has the following:-

Management staff    –          four personnel

Senior – staff                        –          eight personnel

Intermediate staff     –          one hundred personnel

Junior staff                –          seven personnel

The accounting department is made up of six staff headed by the accountant. The six staffs are:

1.            Front office cashier

2.            Accounts controller

3.            Restaurant cashier

4.            Main cashier

5.            Accounts officer

6.            The accountant

ORGANIZATIONAL CHART OF MODOTELS NIG. LTD.

1.1       STATEMENT OF PROBLEM

Poor management of working capital results to liquidity problems which might lead to bankruptcy in very severe cases. When an organization has insufficient working capital it is said to be under – capitalized or over – trading symptoms of over – trading include rapid growth in sales, current and fixed assets, high stock turnover, low average collection period.

Excessive working capital result in idle funds being unnecessary tied down resulting in a loss of profitability for the organization since the idle fund can be invested elsewhere to earn returns for the organization. When a firm has excessive working capital it is said to be under – trading or over capitalization.

A lot of cases of firms collapse have been attributed to such firms neglecting close and careful monitoring of the working capital management.

Some of the bases of the above problem are as follows:

1.            CASH: Insufficient control of cash and detection of its position as to deficit or surplus.

2.            DEBTORS: These are incurred as a result of credit sales and inability to manage it effectively as a natural consequence causes shortages of customers which automatically gives way to a decrease in cash inflow.

3.            INVENTORIES STOCKS:- To maximize the organization’s profitability by determination of the optimum level necessary to minimize cost. This is done by adequate study of cost of holding stocks and cost of shortage in stocks.

1.2         PURPOSE OF STUDY

The main objectives of this research are basically on the components of working capital, and these components include:-

1.            CASH AND MARKETABLE SECURITIES: These are what makes up the liquid assets of the firm, they are also called near cash assets. Cash consists of the firm’s holding of currently (i.e. notes and coins) and demand deposits. Near cash assets are security investment that earn a return and which can be quickly converted into cash when the need arises. The research work tend to identify and define the importance of cash management in respect of its control to ascertain the adequacy of holding marketable securities.

2.            DEBTORS:- To analyse and interpret critically the soundness of investment in debtors as a result of its significant in credit extension by one organisation to another organizations and individuals.

3.            INVENTORY:- To determine the control of stock as it relate to its importance in optimization of profitability.

1.3         SIGNIFICANCE OF THE STUDY

This research will be of paramount importance to the financial manager of an organization since it is basically related to the financial management, consequently, officers who are responsible in any respect for any of the components of working capital will find this research a richly guide in his/her activities performances. These officers may include:-

The production managers, the cost accountant, the management, the treasurer, the internal auditors and the society at large.

STATEMENT OF HYPOTHESIS

For the hypothesis, the following were formulated as the basis of this study which in turn show the performance of the hotel.

1.         Ho – Modotel ltd. has inadequate working capital to meet up with its short term obligation.

Hi – Modotel ltd. has adequate working capital to meet up with its short term obligation.

2.         Ho – Modotel ltd. has not been making sufficient profit to survive and grow for sometime now.

Hi – Modotel ltd. has been making sufficient profit survive and grow for sometime now.

3.         Ho – Modotel ltd. is not able to meet its long term indebtedness as and when due.

Hi – Modotel lts is able to meet its long term indebtedness as and when die.

1.5       SCOPE OF THE STUDY

The scope of this research work is based on the working capital management of a Hotel business with Modotel Ltd, Enugu been the case study.

The area of the scope of the study are as follows:-

1.            CASH: Areas covered are cash movement, cash control system, imprest account system, limits of auditing of cash payment and cash budget.

2.            DEBTORS – Areas covered are collection period, credit policy, collection policy, assessment of credit worthiness and treatment of over due debt.

3.            INVENTORIES: The areas covered include inventory control economic order quantity(EOQ), re – order level, purchase procedures.

1.6       DEFINITION OF TERMS

I.          WORKING CAPITAL: This is the provision of sufficient current asset that will be able to sustain the normal process of acquisition of raw materials and supplies, turning out the unused product and collection of payment.

ii.         GROSS WORKING CAPITAL: This is the summation of current asset of an organization.

iii.        NET WORKING CAPITAL: This is the deduction of current liability from current assets.

iv.        WORKING CAPITAL MANAGEMENT: This deals with the determination of the ratio at which to hold the current assets and current liabilities in the over – all variation of the firm.

v.         CASH: This involves the administration of an orgnaisation to attain maximum cash availability and maximum interest income on any idle fund.

vi.        DEBTORS: This is the extension of credit by one organization to another organization or an individual and the administration of such extension to maximize the worth of the organization in a successful trade off between profitability and liquidity.

vii.       INVENTORIES: This refers to stock or properties of an organization that can be sold or easily converted into cash, or consumed in the production of goods and services or can be sold in the normal transactions.