ROLE OF WORKING CAPITAL MANAGEMENT ON BUSINESS GROWTH, A CASE STUDY OF SELECTED SMALL AND MEDIUM ENTERPRISES IN AKWA IBOM STATE

CHAPTER ONE

INTRODUCTION

• Introduction

According to Nyamao etal (2011), Management of working capital which aims at maintaining an optimal balance between each of the working capital components, that is, cash, receivables, inventory and payables is a fundamental part of the overall corporate strategy to create value and is an important source of competitive advantage in businesses. In practice, it has become one of the most important issues in organizations with many financial executives struggling to identify the basic working capital drivers and the appropriate level of working capital to hold so as to minimize risk, effectively prepare for uncertainty and improve the overall performance of their businesses. The existence of efficient working capital management practices can make a substantial difference between the success and failure of an enterprise and it is of particular importance to the managers of small scale enterprises, because it is they who strive for finances and the opportunity cost of finances, for them is usually on the higher side. Efficient management of working capital is vital for the success and survival of the SSEs which needs to be embraced to enhance performance and contribution to economic growth. There is evidence that many small scale enterprises are not very good at managing their working capital despite their high investments in current assets in proportion to their total assets and this has been a major cause of their high failure rates as compared to large businesses. According to him, majority of the small scale enterprises operate without credit control department implying that both the expertise and the information required to make sound judgments concerning terms of sales may not be available. They also lack proper debt collection procedures, hence, they tend to experience increased risks of late payment and default by debtors who tend to increase where there is an exclusive concern for growth; in this case, small scale enterprises may not be too willing to extend credit to customers who have poor credit risks.

Working capital management is a very important component of corporate finance because it directly affects the liquidity, profitability and growth of a business and is important to the financial health of business organizations of all sizes as the amounts invested in working capital are often high in proportion to the total assets employed. It involves the planning and controlling of current assets and liabilities in a manner that eliminates the risk of inability to meet short-term obligations and avoid excessive investments in these assets (Lamberson, 1995).

1.1 Statement of Problem

Many small scale enterprises are not very good at managing their working capital despite their high investments in current assets in proportion to their total assets and this has been a major cause of their high failure rates as compared to large businesses. According to him, majority of the small scale enterprises operate without credit control department implying that both the expertise and the information required to make sound judgments concerning terms of sales may not be available. They also lack proper debt collection procedures, hence, they tend to experience increased risks of late payment and default by debtors who tend to increase where there is an exclusive concern for growth. It is in view of this necessity for  effective working capital management that this research study is carried out to examine the impact of working capital management on business organizations.

1.2 Objectives of the study

The following are the objectives of the study;

• To examine the role of working capital management on business growth
• To find out the need for effective working capital management in business organizations
• To establish the relationship between working capital management and the productivity of business organizations.

1.3 Research Questions

To achieve the objectives of the study, the following research questions were formulated;

• What are the roles of working capital management on business growth?
• What is the need for effective working capital management in business organizations?
• What is the relationship between working capital management and the productivity of business organizations?

1.4 Significance of the study

The significance of the study is that it will enable small and medium enterprises to understand the concept of working capital management and its role in the growth and sustainability of business organizations. It will reveal the link between effective working capital management and productivity of business organizations. The research study is also significant because it will serve as a reference material to other researchers that are seeking information on the subject.

1.5 Scope and Limitation of the study

– This study covers the role of working capital management on business growth, a case study of selected small and medium enterprises in Akwa Ibom state.

– Three variables as listed in the research questions.

– The use of questionnaire as instrument for data collection.

– Use of descriptive statistics.

– Fifty respondents.

– The use of survey design in conducting the research.

The following stood as limitations to the study

Financial factor: Inadequate funds affected the way data were collected since the researcher had to travel long distances for the distribution and retrieval of the research questionnaire forms.

Time factor: This affected the reduction in the size of the sample used for or the study because the researcher had only less than two months to complete the study.

Material Factor: The material factors that stood as limitations are: shortage of relevant materials for literature review posed a great difficulty, the study was limited to the information gathered from primary and secondary sources.

1.6 Definition of terms

Capital – money that can be used to produce further wealth

Working capital – the money that a business has available for use

Management – the organizing and controlling of the affairs of a business or a sector of a business