THE EFFECTS OF WORKING CAPITAL MANAGEMENT ON THE PROFITABILITY OF AN ORGANIZATION

CHAPTER ONE

1.0   INTRODUCTION

1.1   BACKGROUND OF THE STUDY

Working Capital is the investment at the firm in short-term or current assets, which include cash, account receivable, marketable securities, short-term note receivables, inventories and some expense prepayments. A portion of the investment in current assets is financed by current liabilities such as short-term note payable to banks. Income tax liabilities advances by customers and account payable. Therefore, networking is that portion of current assets financed by long term debt and equity sources.

The liquidity position of many firms is of fundamental importance. Hence, the importance of working capital management and its operations thus become relevant in the growth and success of any organization management policies and decisions are made due consideration of its working capital position. Organization faces a lot of shortcomings in it operation, if working capital is not given full consideration.

Inadequate working capital hinders the success of any organization. This is because it affects the daily operational activities, which directly affect the efficiency rate.

Inadequate cash for marketable securities brought about deficiency in investment and revenue generation for the organization. Inventories are often being short in supply if there is insufficient cash for the daily operation of the organization which will affect the productivity.

If there is inadequate working equipment in the organization, it discourage employee from being performing their official assignment.

The concept of working capital as a tool in financial analysis has long been recognized for instance, the American Institute of Certified Public Accountant (AICPA) in 1936 officially recognized the importance of working capital to the creditor. As a rule, a creditor is more particularly interested in the liquidity of enterprises the nature and adequacy of its working capital, hence the details of this current asset and current liabilities.

Lastly by definitions, in reality and fact working capital is not statistic of fixed figure, it changes continuously as its constitutes are turned over and over again. Often several times within a particular financial year. The crucial importance of working capital has fact, that it is used to finance production inventories and also provide credit to customers. Therefore, the availabilities of sufficient working capital is very vital to successful running of any business.

1.2   STATEMENT OF THE PROBLEM

In all corporate bodies and business enterprises, the availability of sufficient working capital commensurate with the level of business activity, as it is of fundamental importance, while shortage and problems encounter in the process of utilizing working capital affect the banking operation and profitability on whether inadequate provision of working capital, is made how inadequate inventories affect and hinder the success of business operation, the study also is focused on how inadequate cash and marketable securities and lock of proper utilization and allocation of resources affects organizations.

1.3   OBJECTIVES OF THE STUDY

The specific objectives of the working capital management on this study are:

1. To identify ways of improving working capital management in the bank.
2. To identify the working capital management policy adopted by the bank.
3. To assess the process that are involved in the management of the component that make up the working capital i.e. stock, cash, creditor, debtors and marketable securities.
4. To provide useful suggestion and as well make reasonable recommendation were deem necessary.

1.4   SIGNIFICANCE OF THE STUDY

It is significance to established and to analyzes what are the problems of inappropriate working capital management has on the profitability, credit worthiness, possibility of bankruptcy and overall performance. The study would be relevant to student and banking institutions.

To students it enables them to carryout research and personal learning on issue that has to do with working capital management.

1.5   RESEARCH QUESTIONS

i)      Can inadequate provision of working capital lead to loss of profit?

ii)     Can inadequate provision of cash for marketable securities hinder revenue generation?

iii)    Can insufficient working capital lead to total collapse of the enterprises?

iv)    What are the ways to improving working capital management?

1.6   SCOPE OF THE STUDY

This study covers the role played by the working capital management in Bank PHB. It will also cover the aspect of working capital management in Bank PBHB for two (2) years period of 2007 and 2008 which involves working capital components such as current assets, current liabilities, the study will also cover the problems faced in working capital management as well as prospects.

1.7   LIMITATION OF THE STUDY

Constructions to this research are:

• Inability to lay hands on some of the document because the supposed staff and officials try to keep such documents away believing that going through them might be an intrusion into their privacy.

The research work bothers around what the bank considers part of their strategies to a successful banking in Nigeria. Thus, some information was with held.