Working Capital Management As A Tool For Cost Minimization And Profit Maximization

INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Capital can be classified into two broad categories based on
tenure viz. long term and short term capital.
The long term capital of firms is committed to investment in
fixed assets. It includes shareholders’ funds and long term loans.
On the other hand, short term capital is applied for investment in
current assets such as cash, marketable securities and short- term
credits. Current assets are usually acquired very often in varying
quantities depending on the demand structure for the firm’s
product. Each time a decision to acquire current assets is taken,
finance becomes inevitable.
However, it does not necessarily mean that cash has to be paid
each time an order for recurrent production input is placed, rather
it implies that just like in the case of fixed assets, every decision on
current assets has financial implications. For instance, a firm has
to decide how much of the material used for production of goods
and services are to be on credit or on cash and carry basis. it also
has to determine what proportion of its sale has to be on credit.
Also both the optimum and minimum stock levels for raw materials
and work-in-progress (WIP) have to be determined and maintained
at a given point in time.
Orjih (2001:85) refers to working capital as a firm’s investment in
short –term assets cash, marketable securities, trade debtors and
stock, less current liabilities used to finance the current assets. He
stated that working capital management therefore means the
planning and controlling of both current asset and current
liabilities. It involves the administration of cash receivables,
inventories, marketable securities and the current liabilities.
He also discussed the two aspects of working capitals the “gross
working capital: This means that the firm’s investment in current
assets. Current assets are those which can be converted in to cash
within an accounting year and they
Include cash, short term securities, and debtor’s bills receivable
and stock. Net working capital- this refers to the difference between
current assets and current liabilities. Current liabilities are those of
outside is which are expected to mature for payment within an
accounting year.Net working capital can be positive or negative. It is
positive when current assets exceed current liabilities and negative
when current liabilities exceed current assets.
Davidson (1984:401) defined “working capital as “current assets
less current liability”. He also defined it as “circulating capital”.
Weston &Brigham (1977:142) defined working capital
management as “management decision on the amount of capital
invested in various current assets and how this investment is to be
financed”. It is fundamental and of great importance to a business
as it enables the organization conduct its activities from free
financial embarrassment.
Working capital management also aids the management to avoid
the losses consequent upon incurring commitments below or above
its capacity in ordinary course of business.
Retrof (1982:249) said that a firm should always maintain a
sound working capital position for it to have enough to run its
business activities. Both excessive as well as inadequate working
capital position are dangerous from firm’s view point.
Excessive working capital means idle fund which means no
profit for the firm, while inadequate working capital renders the
firm unable to avail attractive credit opportunities and drastic
reduction in the rate of return on total investment. The firm losses
its reputation and capital base could be eroded, there by affecting
the organizations credit worthiness.
Just as blood is life wire of any human being, the working capital
of any company is the pivot around which its day-to-day operations
revolve. it cuts across all departments and functions of an
organization to the extent that all the organizational activities would
ground to a halt of the working capital were not properly managed.
Therefore, the need for a sound and realistic working capital policy
for a manufacturing from like Anambra Motor Manufacturing
Company (ANAMMCO) becomes imperative
A BRIEF HISTORY OF ANAMMCO
The Anambra motor manufacturing company (ANAMMCO) was
incorporated in 1977 as a private limited liability company. It was
established in line with a joint venture agreement which the
government entered with Daimler Benz Ag of Germany, now
Daimler chyler AG (DCH) of Germany as the technical partners. The
shareholding structure is presented as follows in table below:
Table 1: shareholding structure of Anammco
Shareholder’s percentage(%)
Daimler 40
Federal ministry of finance incorporated 35
Other investors 25
100
Source: National council on privatization secretariat bureau of
public enterprises investment opportunities in Nigeria Auto motive
industry.
According to the term agreement, the plant is to assemble/
manufacture Mercedes Benz brands of trucks and buses of different
models and capacity.
The joint venture agreement provided some protection of the
company through import restriction.
The company was to assemble commercial trucks and buses
with payloads of 2.5 tons and above. The company started
production of vehicles with pay load of 5 tons and above. The plant
was commissioned on July 8, 1980 with actual production starting
in 1981.
It has an installed capacity of assembling 750 vehicles per annum
on all a single shift.
The plant is located at Enugu and preliminary inspection
inspection revealed that the facilities were in good technical
condition, which indicated a high standard maintenance. This
actually reflected in the award to the company of 150900l certificate
for total quality management.
Anammco is the second surviving vehicle plant in the country.
It is producing at 10% of its installed capacity as clearly indicated
in the company’s appendix 1.

1.2 Statement of The Problem
The present world economic hazard coupled with economic policies
being operated in the nation has led to a situation where many
business organizations have to fold up. Others barely survive by
thriving on very lean financial and material resources. This is due
to the mere fact that procurement of capital to finance their daily
operations is increasingly becoming difficult. However, the efficient
management and control of working capital can generate a
considerable amount of internal financing.
The project topic seeks to analyze the Anambra motor
manufacturing company’s (ANAMMCO) working capital and its
segment. The study uses ration analysis as a measure of efficiency
of working capital management. The topic will equally determine the
extent to which the profitability of the company is dependent on the
level of its working capital management, using the percentage ratio
measurement.

1.3 Purpose of The Study
The objective of any study undertaken is to contribute to the
development and growth of its case study. The purpose of this study
includes:
a) To show how working capital management can affect the
profitability of the company.
B) To examine the contribution made by the working capital
management on the activities of a manufacturing company, with
particular reference to ANAMMCO.
C) To illustrate the ways in which working capital management can
be used as a tool for cost minimization.
D) To recommend where necessary and appropriate alternative
working capital management technique practical and procedure to
ANAMMCOs top officials.

1.4 Significance of The Study
This work, working capital management as a tool for cost,
minimization and profit maximization will assist biz organization on
their operations and enable them to formulate a working capital
management that is suitable for their business environment in
order to optimize the profit of their operations.
It is hoped that factors that defy the smooth operation of the
company in an area of working capital will be identified. This will go
a long way to aid the management in future planning of an ideal
working capital management. Finally, it is hoped that
recommendations of this work would be of great importance to the
other manufacturing companies that may adopt them to suit their
goals. This research work also intended to provide a base for
further researches inthe area of working capital management, the
government will benefits as efficient and effective working capital
will bring about increase in profits which is taxable, and can also be
used for expansion and employment criteria.

1.5 Research Questions
1 How does working capital management contribute to the
activities of a manufacturing organization?
2 Does working capital management affect the profitability of a
manufacturing concern?
3 Does working capital management lead to cost minimization in
an organization?
4 What are the alternative working capital management
techniques?
These questions when answered will show how well
working capital management contribute s in serving as a tool
for cost minimization and profit maximization in ANAMCCO.

1.6 Statement of Hypothesis
In other to determine the contribution, efficient working
capital management had made towards the performance and
growth of the company, it is important to test the following
hypothesis:
H0: The profitability of a company does not depend on the level
of company’s working management capital.
H1: The profitability of a company is dependent of the company’s
working capital management.
H0: Working capital management is not a tool for management
control in a business concern.
H1: working capital management is a tool for management
control in a business concern.
H0: Ineffective working capital management has no effect on
production.
H1: Ineffective working capital management is the cause of
inefficiency in production.

1.7 Scope of the Study And Its Limitation
In the process of conducting this research topic, the researcher’s
examination will only be concentrated on the case study of
ANAMMCO. This research work will cover working capital
management. The researcher intended as much as possible to
conduct an adequate researcher but could not be achieved due to
some constraints. Based on the developing nature of the nation’s
economy and high demand of adequate working capital, there is
every indication that there are constraints to the validity of the
conclusion reached.
This study is limited by certain constraints required to write of, the
cost incurred in making this project a success. Such limitations
are as follows.
1) Lack of fund required to cover the cost of transportation,
materials for working and typing the project and binding it.
2) Time factor: the time allotted for the completion of this study
is too short for more objective of the results. An extension of
the time given should be encouraged. The researcher is
suggesting that project topic should be approved for the writer
starting from the first semester of the academic session.
3) Co-operation from the staff of the company: The researcher, if
not for the help of friends and well the company and libraries
could have been so difficult. The management and staff
thought that the researcher was about to carry out espionage
to other competitors. It took the researcher some time to
convince the management that the research is strictly for
academic purpose.
4) Lack of exeat to leave school for research materials and to
make more enquires.

1.8 Definitions of Terms
The following terms are defined in the contexts which are used in
this research work:
1 Working capital management: This refers to the
administration of current assets and current liabilities.
2 Working capital: Excess of current asset over current
liabilities. It is also defined as capital available for day- to –
day operations.
3 Current Assets: cash and other assets that are expected to
turn into cash if sold or exchanged within the normal
operating cycle of the firm usually one year.
4 Current liabilities: A debt or obligation that must be
discharged within one year.
5 Gross working capital: This means that firms investment in
current assets.
6 Net working capital: This refers to the difference between
current assets and current liabilities.
7 Liquidity: Refer to the available of cash or near resources for
meeting company’s obligations.
8 Profitability: Accounting for profit relation to asset used in
business operation.
9 Cash flow: cash receipt less disbursement from a given assets
or group of assets for a given period.
10 Effectiveness: This is the extent to which a predetermined goal
or objective is achieved.
11 Efficiency: The extent to which inputs are used in relation to a
given of output.
12 Re-order time: The time at which new stock is due for
procurement.
13 Economic Order quantity: This is the optimum order quantity
for an item of stock, which will minimize cost.
14 Spontaneous financing: Sources of financing that arises from
ordinary business transaction.
15 Accounting: net liquid assets computed by deducting current
liabilities from current assets.
16 Working capital is the cash available for day to day operations
of an organization. One borrows cash to be able to buy assets
or to pay for obligations.