Abstract
The study was conducted to determine the extent of application of working capital management practices in small and medium scale enterprises in Enugu State. Four research questions were developed and answered by the study while four null hypotheses were formulated and tested at p ≤ 0.05 level of significance. The study adopted descriptive survey research design and was carried out in Enugu State. The population for the study consisted of registered 150 small and medium scale business enterprises (SMEs) operators drawn from the three senatorial zones in Enugu State. Due to the manageable size of the population, the entire population was studied; therefore, there was no sampling. The instrument for data collection was a structured 69-item questionnaire entitled Application of Working Capital Management Practices Questionnaire (AWCMPQ), for the purpose of collecting data for the study from the respondents. The research instrument was subjected to face validation by three experts in the Department of Vocational Teacher Education, University of Nigeria, Nsukka. Based on their comments, some corrections were made on the questionnaire to enhance the validity of the research instrument. To determine the reliability of the instrument, the instrument was trial – tested by administering 20 copies of the questionnaire to 20 small and medium scale operators in Anambra State. Therefore, Cronbach Alpha Reliability Method was used, and Cronbach alpha coefficients of 0.83 was obtained for inventory (stock) management practices; 0.79 for cash management practices; 0.77 for debtor’s management practices while 0.85 was obtained for creditors management practices. The overall reliability coefficient of 0.80 was obtained for the entire 69 items in the instrument. Data for the study were collected with the help of nine (9) research assistants. The data collected were analyzed using mean to answer research question, while t-test statistics and analysis of variance (ANOVA) were used to test the hypotheses at 0.05 level of significance. Generally, the study found out that operators of small and medium scale enterprises in Enugu State were to a low extent applying working capital management practices of inventory (stock) management, cash management, debtor’s management and trade creditor’s management practices in their business operations in the State. Based on the above findings, the study among others, recommended that there should be regular workshops organised by experts and academics to sensitize the operators of small and medium scale enterprise on effective application of capital management practices for better performance in the business.
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CHAPTER ONE
INTRODUCTION
Background of the Study
Capital is the life blood of every business; be it micro, small, medium, or large scale business organization. Obi (2002) stated that capital is the store of accumulated wealth contributed to a firm by its proprietor. It is the net worth of the business to the owner. Capital as postulated by Anyaele (2006) is wealth reserved or set aside for the production of more wealth. Capital, as a man-made factor of production includes: physical cash, building, machinery, semi-finished, finished goods and other equipment and tools. Osuala (2001) asserts that business capital also includes any money in the bank or elsewhere, which firms may be using to finance their operations. In furtherance of his view, Osuala (2001) categorized capital of a business into two: fixed capital and circulating capital.
Fixed capital, according to Obi (2002), is used to purchase fixed assets. Fixed assets are assets purchased for use in the business on a permanent basis. Example of fixed assets includes: land, building, machinery, furniture and fittings, and motor vehicle. Osuala (2001), viewed fixed capital as fixed assets. The author stressed that fixed capital in a business involves buildings and machinery. The second category of asset as described by Osuala (2001), includes; money, debts, raw materials and stocks of finished goods. This type of capital is called circulating because it is continuously changing its forms in a cyclical way. Circulating capital is viewed as working capital of a business organization.
Working capital as defines by Obi (2002) is the capital available for running the business over and above the fixed capital. Anyaele (2006), in support of Obi’s view, states that working capital is the capital available for running the business over and above the fixed capital. Anyaele adds that working capital is the current assets minus current liabilities. The Institute of Chartered Accountants of Nigeria
(ICAN, 2006), states that working capital is the excess of current assets over current liabilities. Working capital according to it (ICAN) is therefore concerned with availability of funds to run a business. This is actually, money spent on raw materials, stocks, wages and running expenses
Mathematically: WC=Working Capital, CA=Current Assets, CL=Current Liabilities
The author continues in his argument that working capital has been described as the composition of current assets and current liabilities of business organization. Anyato (2002) explains that working capital of a business comprises cash, account receivables, inventories, marketable securities and account payables. According to the author above, working capital is an indispensable aspect of any business. In fact, no business organization will survive without some amount of working capital. Agara (2005) stresses that working capital plays an important role in business growth and profitability, and it is tightly interlinked with the concept of liquidity. For business to meet its short term obligations and run its day-to-day business activities efficiently and effectively, its working capital must be properly managed.
Management as stated by Osuala (2006) is the organizing, planning and controlling of the total business activities and the leading of people so that the use of men, materials and equipment results in the efficient achievement of planned objectives. The author point out that cooperation is the keynote of management success. Osuala also stresses that men, materials, money, methods, morale and machines (6Ms) must be organized and coordinated to achieve the organizational objectives. The proper use of the six “Ms” will show the greatest success in business activities.
According to Egbo (2007) management is process of doing things to achieve results. The author states that management involves a series of actions, activities, changes and operations deliberately undertaken to achieve a desired goal. It is a process of achieving results through and with people. Grifiin in Egbo (2007) described management as a set of activities such as planning, decision-making and organization’s resources with the aim of achieving organizational goals in an
efficient and effective manner. The author defines a manager as someone whose primary responsibility is to facilitate all the management activities. The paramount roles of management in the working capital of small and medium scale enterprises made it to be a sine -qua non to its growth, profitability and survival.
Working capital management as pointed out by Agara (2005), is a short-term financing strategy, which ensures that assets that are cash or could easily be turned into cash at short notice, say within a year, are properly managed to avoid chaos and closure of operations. The author opines that working capital management is the management of both current assets (management of inventory and cash) and current liabilities (management of debtors and credits). The Institute of Chartered Accountants of Nigeria (ICAN) (2006) postulates that working capital management is measures adopted by business organization to ensure that their current assets exceed their current liabilities at every point in time, in their business activities. Pandey (2007) asserts that working capital management has two concepts: gross and net working capital management. Gross working capital management, refers to the management of a firm’s investment in current assets. Current assets as pointed out by Pandey are those assets which can be converted into (account receivable or book debts, bills receivable and stock or inventory). On the other hand, net working capital management, refers to the management measures adopted to manage the difference between current assets and current liabilities. Current liabilities are those claims of outside which are expected to mature for payment within an accounting year and include creditors, (accounts payable, bills payable and outstanding expenses).
Management of working capital is categorized by Emekekwue (2002) into inventory (stock) management, cash management, debtors management, and trade- creditors management.
Inventory (Stock) Management: These inventories, as according to Pandey (2007) are stocks of the products a company is manufacturing for sale and components that make up the products. The various forms in which inventories
exist in manufacturing company are: Raw materials, work-in-progress, and finished goods. Inventory management as described by Agara (2005) is a measure adopted to minimize cost of stock holding and at the same time to ensure that goods are available to the customers.
Cash Management: cash management as explained by (ICAN, 2006) involves the planning and controlling of cash to ensure that cash is available when required and that it is used efficiently. In support of the view of ICAN, Pandey (2006) states that cash management is concerned with managing:
Cash flow into and out of the business organization.
Cash flow within the business organization.
Cash balances held by the business organization at a point in time by financing deficit or investing surplus cash.
Debtors Management: This as articulates by Agara (2005) refers to all the effort geared towards recovering debts owed to an organization or an individual by other person(s) or entities. It includes trade debtors, loans, advances and pre- payment. Debtors need to be managed to ensure that the default risk, effect of inflation and the effect of losing customers’ patronage do not arise in a business organization.
Trade Creditors Management: Trade credits, as pointed out by Pandey (2006) refer to the credits that a customer gets from suppliers of goods in the normal course of business. While trade creditors are firms that got credit from suppliers of goods in the normal course of business. The author notes that in practical, the buying firms do not have to pay cash immediately for the purchases made. Agara, (2005) in support of the above view, maintains that trade creditors are generally a major source of short-term financing because the company can obtain its required raw materials or enjoy some services now and pay later. Agara further asserts that trade creditors-management is the proper and efficient management of trade creditors to avoid chaos and closure of operations in small and medium scale enterprises.
Small and Medium Scale Enterprises (SME’s) as opines by National Council of Industries (NCI, 2004) is referred to business enterprise whose total costs, excluding land, is not more than two hundred million naira (N200, 000,000.00) only. Small and medium scale enterprises, small and medium industries, small organization are some of the terms that are used interchangeably by some authors to describe small and medium scale enterprise (SMEs).
Many authors like Kalanje (2002), Osuala (2004), and World Business Council for Sustainable Development (WBCSD, 2007), are in agreement that there is no universally accepted definition of SMEs. However, the authors are of the view that the term SME covers a wide range of definitions and measures, varying from country to country and between the sources reporting SME statistics. The Association of Nigerian Development Finance Institutions (ANDFI, 2004), states that some of the commonly used criteria in defining SMEs are the number of employees, value of assets, value of sales and size of capital. Among these, the most common definitional basis used is employees because of the comparatively ease of collecting information on them.
In Nigeria, The Association of Nigeria Development Finance Institution (ANDFI) reported that by the end of 2001, SMEs were enterprises having 11 to 100 employees as compared with USA and Canadian enterprises where less than 500 employees and less than 250 employees in European Union are categorized as SMEs.
Small and Medium Scale Enterprises (SMEs), according to Akogu (2003), occupy a pride of place in virtually every country or state. The author further maintains that because of the SMEs significant roles in the development and growth of various economies, they (SMEs) have apathy being referred to as “the engine of growth” and “catalysts for socio-economic transformation of any country”. SMEs represent a veritable vehicle for the achievement of national economic objectives of employment generation and poverty reduction at low investment cost as well as the development of entrepreneurial capabilities including indigenous technology.
Central Bank of Nigeria (CBN, 2007), submitted that sequel to the vital roles played by SMEs in nation’s economy, it has been a subject of discussion in so many seminars and workshops both locally and internationally. The author states that government at various level (local, state and federal) have in one way or the other focused on the small and medium scale enterprises. Governments have formulated polices aimed at facilitating and enhancing the growth, development and performance of the operators of SMEs.
In the opinion of Summer (2007), an operator is a person or company that manages a particular business. Osuala (2004), asserts that small and medium scale enterprises operators are entrepreneurs who possess characteristics which give them fortitude to continue in small and medium scale enterprises despite obstacles, and the ability to cope effectively in ever – changing situations. These operators possess willingness to take risk while others stand and talk. They are able to identify opportunities to which others are blind. They have an optimum of confidence in themselves well beyond that of others.
In the area of the study, some of the SMEs operators were located in the rural areas, while some of them are in urban areas of the state. Some of them have acquired a high level of experience in their various areas of operations, whereas some still have little experience based on the duration they have stayed in their businesses. These SMEs operators possess various levels of qualifications such as Senior Secondary Certificate Examination (SSCE), National Certificate of Education (NCE)/ Ordinary National Diploma (OND) and Higher National Diploma (HND) Bachelors Degree (B.Sc, B.A., B. Ed and Others). These qualifications, to an extent, influence the competence and skills of the operators. Ibik, Oluka, and Agu (2009), states that good small and medium scale enterprises operators must possess basic competence that will help them in running the business to ensure its survival and growth. These competencies are: ability to identify needs and customers, ability to reach the market, ability to develop appropriate programme
that will help in satisfying the needs identified, and ability to evaluate resource and control.
However, it has been worrisome that despite the incentives, policies, programmes and support aimed at revamping the operators of SMEs, operators have performed rather below expectation in Enugu state. (World Bank, United Nations Industrial Development Organization – UNIDO, 2004). It is against this backdrop that the researcher decided to determine the extent of application of working capital management practices adopted by SMEs operators to know how efficient the SMEs are been managed.
Statement of the Problem
Poor management of working capital causes incessant chaos, non-survival and closure of business operations in small and medium scale enterprises in Nigeria and Enugu State in particular. Inability of small and medium scale enterprises to live up to its purpose of establishment which is to create employment and serve as the engine of growth and catalysts for socio-economic transformation of any country can be attributed to inadequate application of working capital management practices.
Inadequate application of working capital management practices in SMEs could result in several consequences such as business failure and a slow-down or total shut-down in the production capacity. Poor management of working capital also creates negative impact on the liquidity position of a business. And once this happens, illiquidity sets in resulting in business owner been sponsored by creditors and unable to pay their income tax. This could lead to reduction of Government’s income from taxation needed for infrastructural development.
Bankruptcy and job losses could also arise from the collapse of small and medium scale enterprises. This is caused by in-adequate application of working capital management practices; leading to cyclical or mass unemployment. In a state
where people are rendered unemployed due to business failure, there is a tendency that they would engage themselves in vices that could negatively impact or spell doom on the inhabitant of the state.
Since the management of assets that are cash or could be easily converted into cash at short notice defined the success and failure of any business, this study therefore, is designed to determine the extent of application of working capital management practices in small and medium scale enterprises in Enugu State by operators to prevent the dangers of business failure.
Purpose of the Study
The main purpose of this study is to determine the extent of application of working capital management practices in small and medium scale enterprises in Enugu State. Specifically, the study will seek to:
1. determine the extent inventory (stock) management practices are applied in small and medium scale enterprises operation,
2. determine the extent cash management practices are applied in small and
medium scale enterprises operation,
3. determine the extent debtors management practices are applied in small and medium scale enterprises operation,
4. determine the extent trade creditors management practices are applied in small and medium scale enterprises operation.
Significance of the Study
Findings of this study would be of great benefit to the following: operators of small and medium scale enterprises, the general public, business educators and accountant, federal and state ministries of commerce and industry and standard organizations.
Small and medium scale enterprises operators being the main stakeholders in this study would benefit greatly from this study. The study would help both the existing and potential operators of small and medium scale enterprises in Enugu State to fully understand what working capital management is all about; the study will create awareness on the effects of over or under stock in business organizations. It will showcase the benefits of holding cash by business operators which is mainly to meet business opportunities. The work would enlighten the operators of SMEs on the positive impact of trade credit as a source of business finance. It will equally educate the operators of SMEs on how they can obtain trade credit to expand their business outfit. Furthermore, the study will help operators of SMEs to understand the negative effects of improper management of trade debtors. It will help them to avoid bad debt in other to facilitate their survival, growth, expansion and sustenance. The operators of small and medium scale enterprises in Enugu will maintain a liquidity business if they will adjust to the benefit that would emanate from this study as it ought to be.
Similarly, the general public would benefit from this work, be it the existing and potential investors, the study will provide adequate information about the viability of the small and medium scale enterprises they have invested in or will like to invest in. The study would expose the inventory management practices adopted by the operators of SMEs in Enugu State; this will enable the investors to know if the SMEs are over or under stocked. Over stocking of goods will tie down the profit that would have been invested in other profitable business, while under stocking will decreases the profit of the business which will be shared as dividend by the investors, since they cannot meet the demands of their customers. The study would also enable the general public (investors) to be aware of the proper cash management practices, debtors management practices in order to make positive contribution during the SMEs management meetings. Furthermore, the study would provide knowledge to the general public who want to establish small and medium scale business on how to manage their working capital to ensure efficiency and
survival of these businesses. The benefit of the study would further promote self- reliance, alleviate poverty, and abate crime rate and moral decadence in the society.
Meanwhile, business educators and accountants will benefit from this study, being the group saddled with the responsibility of educating and monitoring the activities of the SMEs operators, the study will expose all the deficient areas in working capital management with regards to inventory, cash, debtors and trade creditors to improve the efficiency of SMEs operators in Enugu State. The study would enable the accountants know when there are problems in SMEs working capital in other to proffer immediate solution. Lack of timely provision of adequate solution to SMEs inventory, cash, debtors and creditors management practice problem, will spell doom to the survival and efficient operation of the businesses.
Furthermore, federal and state ministries of commerce and industries will benefit from this study. Since government efforts are geared towards creation of more SMEs in the country to rescue unemployment problems, this work will enable government discover key areas in inventory, cash, debtors and creditors management that need improvement and make appropriate policies that will enhance productivity, create job opportunities and increase the standard of living for the operators of SMEs in Enugu State. Adequate government policies on inventory, cash, debtors and creditors management practices will enable small and medium scale enterprise to survive and create employment as it ought to be.
Finally, the study would be of great benefit to standard organization like Nigerian Association of Small and Medium Scale Enterprise (NASME), Small and Medium Enterprises Development Agency Nigeria (SMEDAN), being corporate institutions mandated to handle the activities and affairs of the small and medium scale enterprises. The result of this work will proffer solution to the lapses encountered by small and medium scale business operators in Enugu State in inventory (stock) management, cash management, debtors management and creditors management. These solutions proffered by this work, would serve as a reference point that corporate institutions will dwell on during capacity building,
seminars and workshops that will be organized for the training and re-training of these SMEs operators on how effectively they can manage their inventory, cash, debtors and trade creditors.
Research Questions
The following research questions were formulated to guide the study:
1. To what extent do SMEs operators apply inventory (stock) management practices in small and medium scale enterprises?
2. To what extent do SMEs operators apply cash management practices in small and medium scale enterprises?
3. To what extent do SMEs operators apply debtors’ management practices in small and medium scale enterprises?
4. To what extent do SMEs operators apply trade creditors’ management practices in small and medium scale enterprises?
Null Hypotheses
The following null hypotheses based on the research questions were formulated for the study and tested at 0.05 level of significance:
1. H01 – Location is not a significant source of difference in the inventory (stock) management practices adopted by the operators of small and medium scale enterprises.
2. H02 – Experience is not a significant source of difference in the cash management practices adopted by the operators of small and medium scale enterprises.
3. H03 – Qualification is not a significant source of difference in the debtors management practices adopted by the operators of small and medium scale enterprises.
4. H04 – Age is not a significant source of difference in the trade creditors management practices adopted by the operators of small and medium scale enterprises.
Delimitation of the Study
The study in its content and scope covered the extent of application of working capital management in small and medium scale enterprises in Enugu State. Special emphasis was to determine the inventory (stock), cash, debtors and creditors management practices adopted by their operators to ensure its growth and survival.
This material content is developed to serve as a GUIDE for students to conduct academic research
EXTENT OF APPLICATION OF CAPITAL MANAGEMENT PRACTICES IN SMALL AND MEDIUM SCALE ENTERPRISES IN ENUGU STATE
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