An Examination on the Management of Working Capital

GENERAL BACKGROUND OF THE STUDY

The enactment of the Nigeria Enterprise, promotion Decree of 1972, otherwise known as Indigenization Decree, made many businesses which were higher in the hands of foreign business men to pass into the hands of Nigerians. Perhaps by more co-incidences the economy became over liquid. The result at the excess liquidity was inflation.

To succeed in this new challenge passed by the said Indigenization Decree, Nigerian entrepreneurs and business concerns need at least a fair comprehension of essential aspects of financial management and more specifically, working capital management.

Generally, it is believed that the presumed objective at financial management especially in private organizations is the maximization of the value of the firm. Thus, wealth maximization of the present value of the future streams of cash inflows of the shareholders which are a derivative at the profitability of a firm. (Brokington, 1983).

Although profitability may be considered the objectives at a business, nevertheless, the mismanagement of work capital can effectively bring to a half, or to its ultimate downfall, what might otherwise be a successful and profitable organization.

Therefore, according to Howard (1982) working capital is defined as ”the asset held for current use within a business less the amount due to those who await settlement in the short-term in whatever form”. In the same vein,

Olowe (1997) views working capital as “the capital available for running the day to day operation of and organization. It is defmed as current Assets less Current liabilities”.

Current Assets are the circulating assets of the business; these are the assets that are not permanent in nature. They include: Cash at hand and bank; Short-term investments such as treasury bills; Stock of raw materials, work-in-progress and finished goods; Debtors, Accrued income etc. Current liabilities on the other hand are debts of the business that have to be settled within the following twelve months. They include; Creditors; Current taxation, Bank overdraft etc. A current liability for a sizeable part of the business sources at finance and it is the cheapest form at business finance (Olowe, 1997).

Pandey (1986) views working capital form two perspectives. These are gross working capital and net working capital. Gross working capital means “firms investment in current assets. Net working capital on the other hand is “current asset less current liabilities”.

The importance of gross working capital is indicated by optimum investment in current assets. Here, the investment neither is in excess; resulting into tying down the capital of the business, nor investment inadequate; which will make the business insolvent. On the other hand, net working capital implies, that the current liabilities.

This is necessary in order to protect the interest of creditors. For this to be effective, current assets must be well above currents liabilities. Here, current ratio of 2.1 may be considered necessary (Pandey, 1986).

In view of the forgoing, working capital management is that managerial effort or approach which seeks to ensure that correct amount of investment are made by firms in working capital, adequate enough to cope with the business level being operated by that firms.

Working capital management therefore reverses to the management at all aspect of current assets and current liabilities. Hence, the managing working capital, it is essential to known the amount to be invested in current assets and the appropriate sources from which the finance will come.

Evidently, two extremes are easily notice at regards investment in working capital by firms, that is

·         Having excessive working capital and;

·         Having in adequate working capital

However, the objective of a finance manager as regards the management of working capital is the strike a balance: between these two extremes because excessive working capital is expensive and inadequate working capital very dangerous. These extremes can be likened to liquidity and profitability on which compromise is being achieved with managerial effort on working capital (Brokington, 1983).

In essence, working capital management hopes to ensure the most efficient use to resources open to the firms, and it also involves making sure that the commitment to working capital is as low as possible. However, this is determined to a larger extent by the type of industrial involved, but there may be other policy considerations which may influence the level. (Pandey 1985).

 BACKGROUND OF THE COMPANY NIGERIA BAG MANUFACTURING COMP ANY-(BAGCO)

 Historical Background

The company, Nigeria Bag manufacturing Company Limited

(Bagco) was incorporated in 1964 as a wholly owned subsidiary of flour mills of Nigeria plc. Almost immediate bagco’s pioneering spirit was established in 1972 new polypropylene bag manufacturing equipment was installed in the premises at Eric Moore Road, Surulere Lagos. As the first company in Nigeria to embrace this new technology Bagco enjoyed rapid expansion such that by 1978 the complete production range had been transferred to the new polypropylene technology.

Over the next decade bagco grew steadily as the production base was increased to meet the increasing demands of the market in terms of volume and product range. The next step for Bagco was to incorporated Northern Bag manufacturing Company Limited (Bagco North) in 1990 thereby enabling Bagco to become a truly pan Nigeria manufacturer. Bagco North commenced operations at sharada phrase 3, Kano in 1991. The 1990 saw both Bagco and Bagco North developed a product range of plain woven and laminated bags to meet the demands of Industrial, Agricultural and Domestic customers. Bagco Group had now truly become a house hold name with everybody knowing “Bagco Super Sack”.