CHAPTER ONE

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

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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

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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

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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

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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.

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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.

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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.

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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

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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?

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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:

H

0

: The profitability of a company does not depend on the level

of company’s working management capital.

H

1

: The profitability of a company is dependent of the company’s

working capital management.

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H

0

: Working capital management is not a tool for management

control in a business concern.

H

1

: working capital management is a tool for management

control in a business concern.

H

0

: Ineffective working capital management has no effect on

production.

H

1

: 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.

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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.

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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.

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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.

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REFERENCES

Davidson S.(1984) Management Accounting Japan: Sauder’s

international.

Orji J (2001) financial management Enugu: Splash media

organization.

Retrof J V(1982) Small Business Management New-York: MC Gram

Hall.

Weston J.E and Brigham. E. (1972) Management Finance Usa:

Wilhos Dryden

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