APPRAISING WORKING CAPITAL MANAGEMENT PRACTICE OF SMALL AND MEDIUM SCALE ENTERPRISE IN AKWA IBOM STATE (A STUDY OF SELECTED FIRMS IN UYO LOCAL GOVERNMENT AREA)

APPRAISING WORKING CAPITAL MANAGEMENT PRACTICE OF SMALL AND MEDIUM SCALE ENTERPRISE IN AKWA IBOM STATE (A STUDY OF SELECTED FIRMS IN UYO LOCAL GOVERNMENT AREA)

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INTRODUCTION

Background of the Study

Working capital management amongst Small and Medium Scale Enterprises (SMEs) appears to have been relatively neglected despite the fact that a high proportion of failures in businesses, is due to poor decisions concerning the working capital of enterprises (Tewolde, 2002).

Management of working capital is an important component of corporate financial management because it directly affects the profitability of the firms. But what could working capital and working capital management mean? According to Bhattacharya (2009), the concept of working capital was first evolved by Karl Marx in 1914, though in a somewhat different form, and the term he used was “variable capital”. Working capital is the capital required to finance a firm’s day-to-day operational activities. It can be defined as current (short-term) assets minus current (short-term) liabilities. Adequate working capital is vital in maintaining a firm’s liquidity. On the other hand, working capital management is concerned with the management of a firms short-term assets (stocks, debtors and cash), short-term liabilities (creditors and borrowing), and short-term cash flows (Park and Gladson, 2003). McMenamin (2005) noted that the goal of working capital management is to secure the optimum investment in working capital consistent with the overall financial goal of shareholder wealth maximization.

Working capital management is often denoted by its components. Hence, the Average Collection Period (ACP); the Inventory Conversion Period (ICP) and the Average Payment Period (APP) are various components of working capital management explained by Mathuwa (2009). According to him, the Average Collection Period (ACP) is the time taken to collect cash from customers. The Inventory Conversion Period (ICP) refers to the time taken to convert inventory held in the firm into sales, the Average Payment Period (APP), is the time taken to pay the firms suppliers. More explicitly, Planware (2011) outlined the components of working capital management to consist of: cash management; accounts payable management; accounts receivable management; investment management; inventory management, marketable security management; and cash equivalent management.

Small and Medium Scale Enterprises may have an optimal level of working capital that maximizes their value. Raheman & Nasr (2007) posited that large inventory and a generous trade credit policy may lead to high sales. Large inventory reduces the risk of stock out. The credit may stimulate sales because it allows customers to assess product quality before paying. Another component of working capital is account payables. Delaying payments to suppliers allows a firm to assess the quality of bought products, and can be an inexpensive and flexible source of financing for the firm. On the other hand, late payment of invoices can be very costly if the firm is offered discount for early payment. A popular measure of working capital management is the cash conversion cycle i.e. the time lag between the expenditure for the purchases of raw materials and the collection of sales of finished goods. The longer this time lag, the larger the investment in working capital (Deloof, 2003). A longer cash conversion cycle might increase profitability because it leads to higher sales.

However, corporate profitability might also decrease with the cash conversion cycle, if the costs of higher investment in working capital rise faster than the benefits of holding more inventories and/or granting more trade credit to customers.

Therefore, the management of these components of working capital management discussed above will in no doubt help the success of Small and Medium Scale Enterprises in generating value. Infact, efficiency in managing the working capital of SMEs determine their end results, since one of the major goal of a business is to maximize profits.

According to Akwa ibom state Directory in Anyia (2006), the structure of the Akwa ibom state Industrial sector is dualistic. It is characterized by a large numbers of small and medium scale enterprises and a few numbers of large scale firms. The structure of the industrial sector size, the small and medium scale businesses accounted for 65.5% and 32% respectively, while the large scale businesses accounted for only 2.5%. However, in terms of output the small scale businesses and the medium scale businesses accounted for 10% and 5% respectively, while the large scale businesses accounted for 85% of industrial output. The small scale businesses tend to be rural based, while the medium scale businesses produce in urban areas in competition with numerous micro-businesses. The geographical distribution of Small and Medium Scale Enterprises in Akwa ibom state show a heavy concentration of activities in South and North Senatorial districts of the state, probably due to availability of basic infrastructure that is relatively well developed.

On the variables mentioned in the preceding paragraph, researchers have approached working capital management in numerous ways while some studied the impact of proper or optimal inventory management; others studied the management of accounts receivables trying to postulate an optimal way policy that leads to profit maximization (Deloof, 2003; Mayasami, 2009; Gill, Biger & Mathur, 2010). Hence, this study carved out another niche by critically appraising the working capital management practice of small and medium scale enterprises in Akwa ibom state, with the view of establishing the focused components of working capital management’s (sources of financing working capital, cash management, account receivables management, inventory management, accounts payable management, and investment management) level of requirement as a practice by Small and Medium Scale Enterprises for effective operations (profitability, optimal resource utilization, retained earnings, and liquidity) in Akwa ibom state, Nigeria.

STATEMENT OF THE PROBLEM

Despite the fact that Small and Medium Scale Enterprises are the engine room behind a nation’s development, yet this sector is bedeviled by several constraints amid poor working capital management practices which continues to mar its laudable objectives. It has been widely accepted that the profitability of a business concern vis-à-vis Small and Medium Scale Enterprises (SMEs) in Akwa ibom state largely depends upon the manner in which its working capital is managed(Planware, 2011). Both excessive and inadequate working capital is harmful for a firm. Excessive working capital leads to unremunerative use of scarce funds. On the other hand, inadequate working capital usually interrupts the normal operations of SMEs.

Small and Medium Scale Enterprises often encounter several problems in their working capital management like: not knowing the required sources of financing working capital; inappropriate management of cash flows; no laid down collection policies of accounts receivables; frequent inventory stock-out; poor controlling of accounts payables; and non-evaluation of risk on investment (Lyytinen, 2009). More so, Tewolde (2002) identified that most firm’s vis-à-vis Small and Medium Scale Enterprises are characterized with both internal and external problems: Internally, firms hold inappropriate levels of working capital- resulting to uncontrolled cost of holding the working capital items and externally, the firms lack proper policies and practices of co-operation with their suppliers and customers on financial matters.

Purpose of the Study

The main purpose of this study was to appraising the working capital management practice of small and medium scale enterprises in Akwa ibom state, Nigeria. Specifically, the study determined the:

1.                                                      sources of financing working capital required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state

2.                                                      cash management practices required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state

3.                                                      accounts receivable management practices required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state

4.                                                      inventory management practices required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state

5.                                                      accounts payable management practices required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state

6.                                                      investment management practices required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state

SIGNIFICANCE OF THE STUDY

The findings of this study would be of tremendous benefit to the management of Small and Medium Scale Enterprises (SMEs), on the required practices of the components of working capital like: cash management practices, accounts receivables management practices, inventory management practices, accounts payable management practices, and investment management practices. The understanding and application of these working capital management components, will in turn lead to the profitability, liquidity, reduction of financial cost, and ease of releasing more capital for the strategic objectives of SMEs.

The findings of this study, would also be useful to agencies and associations of Small and Medium Scale Enterprises like; Small and Medium Scale Enterprise Development Agency of Nigeria (SMEDAN), and Nigerian Association of Small and Medium Scale Enterprises (NASME). It provides updated and relevant information to these agencies and associations on the various sources of financing working capital available to SMEs. Haven been updated on the sources of financing working capital; these agencies and associations would better channel their workshops, seminars, conferences and trainings on various strategies Small and Medium Scale Enterprises in Nigeria vis-à-vis Akwa ibom state can engage in, to appropriate these funds and how the funds could be proper utilized to gain efficiency amongst SMEs.

Another benefit of this study would be to the Government. Since 1974, the Small-Scale Industry (SSI) division in the Federal Ministry of industries was established to be the policy making and implementation unit responsible for the administration of Small and Medium Scale Enterprises development programmes. The findings of this study will aid the Government through this agency to be informed of the various working capital management practices (i.e. cash management practices, accounts receivables management practices, inventory management practices, accounts payable management practices, and investment management practices) and thus, these practices will engender the formulation and implementation of favourable policies that would enhance the working capital management practices of Small and Medium Scale Enterprises in Akwa ibom state, Nigeria.

Also, the result of this study will be beneficial to business educators, especially accounting educators on key areas they would focus on in equipping students with the relevant skills on cash management, accounts receivables management, inventory management, accounts payable management, and investment management; which will enable business education students to stand the better chance of succeeding when they establish Small and Medium Scale Enterprises.

Furthermore, researchers in Business Education and other related disciplines in this area of study, would find this study very useful as a reference material. Thus, this will help to increase the data bank of these future researchers on the specific objectives of: cash management practices, accounts receivables management practices, inventory management practices, accounts payable management practices, and investment management practices, leading these researchers to adopt or adapt the working capital management practices most suitable in their studies or researches.

Research Questions

The following research questions were answered, in line with the purpose of the study:

1.                                                      What are the sources of financing working capital required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state?

2.                                                      What are the cash management practices required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state?

3.                                                      What are the accounts receivable management practices required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state?

4.                                                      What are the inventory management practices required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state?

5.                                                      What are the accounts payable management practices required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state?

6.                                                      What are the investment management practices required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state?

Hypotheses

The following null hypotheses formulated for the study, were tested at 0.05 level of significance:

Ho1:                There    is   no    significant    difference    between    the   mean    responses    of

managers and accountants on the sources of financing working capital required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state

Ho2:                There    is   no    significant    difference    between    the   mean    responses    of

managers and accountants on the cash management practices required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state

Ho3:                There    is   no   significant    difference    between    the   mean    responses    of

managers and accountants on the accounts receivable management practices required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state

Ho4:                There    is  no  significant  difference  between  the           mean  responses      of

managers and accountants on the inventory management practices required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state

Ho5:                There    is   no   significant    difference    between    the   mean    responses    of managers and                        accountants      on                 the               accounts    payable        management  practices required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state

Ho6:                There    is   no   significant    difference    between    the   mean    responses    of managers and accountants on the investment management practices required by Small and Medium Scale Enterprises for effective operations in Akwa ibom state

DELIMITATION OF THE STUDY

There are many factors that affect the effective operations of business organizations from achieving their set objectives. Generally, the study focused on appraising the working capital management practice of small and medium scale enterprises in Akwa ibom state, Nigeria. Specifically, the study also focused on the following areas of working capital management: sources of financing working capital, cash management, accounts receivable management, accounts payable management, investment management and inventory management. The study is delimited to only managers and accountants of Small and Medium Scale Enterprises in the three senatorial zones of Akwa ibom state, because they are in the managerial level of these enterprises. The questionnaire served as the instrument for gathering data. Though, the results of this study could be generalized to other areas with similar characteristics as those within this study.


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