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CHAPTER ONE
- INTRODUCTION
1.1BACKGROUND OF THE STUDY
It is surprising that most of the companies go bankrupt and collapse not because they are not profitable but because their inability to meet their mature obligations. This is usually due to the inefficient management of their working capital, particularly in manufacturing companies. Therefore, the survival of a company depends largely on the availability of adequate working capital as well as the proper management of each of its component to have optimality.
Working Capital management involves the relationship between a firms short term assets and its short term liabilities. The basic goal of the working capital is to ensure that a firm is able to continue its operation and has sufficient ability to satisfy both maturing short term debts and upcoming operational expenses. This is done so as to avoid two ugly situations of our capitalization and under capitalization.
Over capitalization according to olowe (2007) is an inefficient working capital management that results in excessive stocks, debtors and cash with very few creditors. The implication of this is that, it impairs te firm’s profitability as idle investment earns nothing. The idle investment could have been invested in other profitable investment like marketable securities.
Under capitalization on the other hand occurs if a firm is trying to support large volume of production with little long term capital at its disposal.
The implication is that it can threaten the solvency of a firm because of its inability to meet its current and manufacturing obligation.
Thus the ultimate aim of management of working capital is to maintain an optimum level of working . in maintaining an optimum level of working capital the company must avoid our capitalization and under capitalization.
1.2 STATEMENT OF THE PROBLEM
The survival of a business firm or company depends largely on its ability to properly manage its working capital components. The prevailing issue of management of resources in the country particularly the manufacturing companies has made it to be paramount importance to look into the management of working capital in this sector.
An efficient working capital management lead to over trading or under trading. The result of these two unfavorable condition lead to insolvency or lower return on capital employed. It adversely affects the profitability and liquidity of a company. This study intend to address the problem of inefficiency in the management of working capital in manufacturing companies by solving the problem, the manufacturing company in particular should be able to manage the components of its working capital in order to maintain an optimum level of working capital.
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