THE IMPACT OF WORKING CAPITAL MANAGEMENT ON THE PROFITABILITY OF MANUFACTURING COMPANIES LISTED ON THE GHANA STOCK EXCHANGE

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ABSTRACT

The purpose of the study is to examine the impact of working capital management on the performance of some selected listed manufacturing companies in Ghana. To achieve this, 10 manufacturing firms listed on the Ghana Stock Exchange were employed. Data was sourced from firm annual financial report for a period of Nine (9) years from 2009-2017. The panel regression model was used for the analysis.

With two performance indicators; return on asset and return on equity, the study found the average collection period, cash conversion cycle and liquidity independent variables to have significant implications on the return on asset variable of the manufacturing companies employed in this study. The average collection period and cash conversion cycle were found to have a negative and significant relationship with return on asset while liquidity have a positive and significant relationship with return on asset. Also, the average collection period, net trading cycle and the business size were found to have significant impact on return on equity. The average collection period and net trading cycle were found to have a positive and significant relationship with return on equity while the business size had a negative and significant relationship.

It is recommended that firms should strive to have a shorter cash conversion cycle to make manufacturing firms more efficient in managing the cash flow. Manufacturing firms need to collect accounts receivables more quickly, through improving the efficiency of the collection processes, offering discounts and charging interest on overdue accounts.

Key words: Manufacturing Firms, Working Capital Management, Performance, Stock Exchange.

CHAPTER ONE INTRODUCTION

             Background to the Study

Since time immemorial the management of working capital has been one topical issue financial analysis and managers consider critical in any firm performance. This is mainly because, the goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses Essentially, the concept of management of working capital involves managing inventories, accounts  receivable,  accounts  payable  and  cash  and cash equivalent,     In modem financial management, administration of working capital is an important and challenging task due to high proportion of working capital in a business and some of its peculiar characteristics The management of current assets (normally converted into cash within an accounting year) and current liabilities (generally discharged within a year) and the interrelationship that exists between them may be termed as working capital management Excessive levels of current assets may have a negative effect on the firm’s profitability whereas a low level of current assets may lead to lower level of liquidity and stock outs resulting in difficulties in maintaining smooth operations (Van Horne and Wachowicz, 2004) Traditional concept of working capital is the different between assets and current liabilities Thus, working capital management is an attempt to manage and control the current assets and the current liabilities in order to maximize profitability and proper level of liquidity in business

Liquidity and profitability are two important and major aspects of corporate business life (Vataliya, 2009) The problem is that increasing profits at the cost of liquidity can bring serious problems to the firm Therefore, there must be a trade-off between these two objectives (liquidity and profitability) of firms One objective should not be at the cost of the other because both have their own importance If firms do not care about profit, they cannot survive for a longer period In other round, if firms do not care about liquidity, they may face the problem of insolvency or bankruptcy For these reasons managers of firms should give proper consideration for working capital management as it does ultimately affect the profitability of firms As a result company can achieve maximum profitability and can maintain adequate liquidity with the help of efficient and effective management of working capital

Inefficient financial management including working capital management may damage business enterprise’s profitability (Gebrehiwot & Wolday, 2006) The efficient management of working capital is a fundamental part of the overall corporate strategy to create shareholders value (Nazir and Afza, 2008) In addition, efficient working capital management leads to improve the operating performance of the business concern and it helps to meet the short-term liquidity (Paramasivan, Subramanian, 2009) Therefore, firms try to keep an optimal level of working capital that maximizes their value (Deloof, 2003) In addition to that, the effective working capital management is very important because it affects the performance and liquidity of the firms (Taleb et al., 2010) The main objective of working capital management is to reach optimal balance between working capital management components (Gill, 2011) Large inventory and generous trade credit policy may lead to high sales Large inventory also reduces the risk of a stock-out Trade credit may

stimulate sales because it allows a firm to access product quality before paying (Raheman & Nasr, 2007)

Another component of working capital is accounts payables, Raheman & Nasr (2007) indicated that delaying payment of accounts payable to suppliers allows firms to access the quality of obtaining products and can be inexpensive and flexible source of financing On the other hand, delaying of such payables can be expensive if a firm is offered a discount for the early payment By the same token, uncollected accounts receivables can lead to cash inflow problems for the firm A popular measure of working capital management is the cash conversion cycle, that is, the time span between the expenditure for the purchases of raw materials and the collection of sales of finished goods Deloof (2003) found that the longer the time lags, the larger the investment in working capital, and also a long cash conversion cycle might increase profitability because it leads to higher sales However, corporate profitability might decrease with the cash conversion cycle, if the costs of higher investment in working capital rise faster than the benefits of holding more inventories or granting more trade credit to customers And the main cause of the failure of a business enterprise has been found to be the shortage of working capital, their mishandling, and mismanagement of working capital and underutilization of capacity (Vataliya, 2009) In general, working capital management is not only improving financial performance in today’s cash strapped and uncertain economy, but it is the question of meeting firm’s day to day operation

With this, it is a significant issue to know and understand the impacts of working capital management and its influence on firms’ performance This study provides the understanding into working capital management and performance of listed manufacturing companies in Ghana

             Statement of the Problem

The working capital of every manufacturing company is imagined to be the blood current in the vessels of a business entity In order to save the survival of the business entity, management of this part is claimed to be key to the business entity and the engine to the survival of the organization Experiences have shown that one of the main reasons for financial disturbances and bankruptcies in most companies is the mismanagement of working capital (Setayesh, 2009) Essentially, working capital management is not only improving financial performance in today’s cash strapped and uncertain economy, but it is the question of meeting firm’s day to day operation

Therefore, it is a significant issue to know and understand the impacts of working capital management and its influence on firms’ performance Also, several research works have identified the impact of working capital management on the performance of organizations, but no significant work appears to have been done on the impact of working capital management on the performance of listed manufacturing companies in emerging economics like Ghana This limited evidence in the context of Ghana along with the importance of working capital management invite for research on their impacts on firms’ performance Considering of the above points, the general objective of the study will be to examine the impacts of working capital management on the performance of listed manufacturing companies in Ghana.

             Research Purpose

Many companies has suffered competitive push out of various industries for poor management of working capital. Therefore, proper working capital management is essential for the growth and stability of every firm. For this reason, the purpose of this study is mainly to provide a detailed understanding into the concept of the working capital management and its effect on the performance of manufacturing companies listed on the Ghana Stock Exchange Market.

             Research Objectives

The study broadly examines the impact of working capital management on the performance of some selected listed manufacturing companies in” Ghana. Most specifically the study seeks to;

  •   examine the impact of cash management on firm performance of listed manufacturing firms in Ghana
    •   evaluate the effect of inventory management on firm performance of listed manufacturing firms in Ghana
    • “determine the impact of liquidity management and firm performance of listed manufacturing firms in Ghana

             Research Questions

From the objective of the study which examines the impact of working capital management on the performance of listed manufacturing companies in Ghana, the research is motivated to as the following questions.

  • What is the impact of cash management on firm performance of listed manufacturing firms in Ghana?
    • What is the effect of inventory management on firm performance of listed manufacturing firms in Ghana?
    • What is the impact of liquidity management and firm performance of listed manufacturing firms in Ghana?

             Significance of the Study

The study aims at explaining the impact that working capital management have on the performance of listed manufacturing firm in Ghana. The benefits of managing firm capital properly, the extent of asset management as well as determine whether they are more likely managing these capitals efficiently to maximize shareholders wealth.

This research paper seeks to add to already existing knowledge towards developing strategies for providing measures to managing financial assets, create awareness towards enabling and encouraging them to save money, accessing credit facility or undertaking financial transactions to enhance the working conditions of manufacturing companies in Ghana.

             Scope of Work

The research is restricted to the knowledge in working capital management based on these thematic of study from the listed manufacturing companies in Ghana and to identify the other

issues of working capital management that affect performance of financial institution in Ghana The research is also for a period of one year from 2018-2019.

The research seeks to assess the impact of Working capital management and performance on listed manufacturing companies in the Greater Accra Region of Ghana The study is expected to span over a period of one year and would involve only the listed manufacturing companies in Ghana