CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Working capital management involves not only the management of current assets but also the management of current liabilities and the relationship between the two. Time is the feature of all items making up working capital. Working capital describes the assets and liabilities of a business that are related directly to its trading activities. Some of them are held to enable the business to function, such as debtors and creditors. They are the items in the balance sheet whole vale and nature change continuously, since they are turned over regularly in the course of normal trading. Working capital liabilities are those for which the business is most immediately at risk, hence, they are normally termed current liabilities.
Working capital assets are those on which the business can call most easily: hence, they tend to be referred to as current assets. Many businessmen control their working capital very carefully, they are aware that however high national profit is, survival and real success depend on whether profit materializes into cash and whether that cash is available when the business needs it. Controlling the working capital will be limited value unless it is exercised within a framework, which takes into account: 1. The assets required to achieve the objective of the business. 2. The way in which such assets are used. 3. The way in which the business chooses to finance its activities. Without adequate cash, a business cannot exist. For this simple reason cash is often described as the “Lifeblood of a business and its control the means of maintaining commercial health”. Liquidity is a pre-requisite for commercial life and cash management is as natural as staying alive: It is the Naira amount of a firm’s current assets including cash and short term investments, account receivable and inventories.
These assets are regarded as liquid because they can be converted to cash within one year. Considering the diversity of the scope of operations among our millions, of business firms, the many varieties of their seasonal patterns, the varied influences of secular growth and decline, the diverse effects of cyclical developments in general business activities, the wide differences in the degrees of competition among firms and industries, and variations among firms in their access to new sources of cash, it is patently impossible to formula a set of asset management rules or policies that would be good for all businesses at all times. Indeed a most reasonable conclusion is that asset management policies that are good for a given firm at a given time may be quite bad for another at that time, as well as for the firm itself at other times when surrounding circumstances have changed. Managing the firm’s net working capital position (that is, its liquidity) has been shown to involve simultaneous and interrelated decisions regarding investment in current assets and use of current liabilities. Fortunately, a guiding principle exists that can be used as a benchmark for the firm’s working capital policies: The hedging principles, of principle of self-liquidating debt. This principle provides a guide to the maintenance of a level of liquidity sufficient for the firm to meet its maturing obligations on time.
1.2 STATEMENT OF PROBLEM
The management of the working capital of any organization is sensitive area of that organization and its growth and strength depends on it. In this country, much is not being said about the working capital management of firms and because of this much is not known about the importance of the management of working capital of firms.The problem of inadequate information about the working capital management shall be addressed in this work.
