Every Successful Company Needs to Manage Working Capital Management

Manufacturing sector is very germane to the development of any nation most especially the underdeveloped ones and the sector all over the world has been and would always be the engine of development and industrialization. Adeoye and Elegunde, described all industries and particularly the manufacturing industry as the heart of any economy. The importance of manufacturing sector of any economy to its growth and survival cannot be overemphasized. Outputs in manufacturing companies are usually products offered to customers that result in profits shared by its owners. Nigeria, among other developing countries, is striving to compete in the global market, and for that reason, the manufacturing industry needs to maintain and boost local capabilities for their economic strength and stability. Long time survival and the ability to produce useful outputs and improve performance is the overall goal of any company.

In addition, it has been argued that the persistent poor performance of the manufacturing sector in Nigeria is mainly due to massive importation of finished goods, inadequate financial support and other variables which has resulted in the reduction in capital utilization and output of the manufacturing sector of the economy (Tomola, Adebisi & Olawale, 2012). Thus, the manufacturing sector is a key variable in an economy and they motivate conversion of raw materials into finished goods. Charles (2012), posited that the manufacturing industries create employment which helps to boost agriculture and diversifying the economy in the course of helping the nation to increase its foreign exchange earnings. Nigerian export history over this period is the history of its oil exports and the very large changes in the price of oil on the world market. The rich endowment of oil has important implications for the tradable sector of the economy generally and the manufacturing sector in particular, and it is often argued that Africa's resource endowments mean that it will not be able to export manufactures (Wood, 1997). The World Bank (2000) discusses the need for African 17 countries to diversify their exports. This is highly relevant in the case of Nigeria; the failure of exports to grow essentially reflects the failure in manufacturing contribution Financing is also another major determinant justification of firms' performance variance; Firms capacity to meet up with investment demands, financing demands, and transactions are limited in respect to financial ability and access to funding, which are either from equity source or through debt financing. The interest rate is one of the major factors to consider in debt financing decision making. Therefore, firm's exposure to these risks is not without consequence on performance, as this is a line charge on firms' earnings.

On the other hand, financial performance is a way to satisfy investors and can be represented by profitability, growth and market value. These three aspects complement each other. Profitability measures the firm’s ability to generate returns. Growth demonstrates the firm s past ability to increase its size and market value represents the external assessment and expectation of the firm’s future performance. An ideal business needs sufficient resources to keep it going and ensures that such resources are maximally utilized to enhance its profitability, growth and overall performance. Thus, firms imitating high financial performance portray that the management of the firm are using the resources effectively and efficiently and is often pronounced in terms of growth of the sales, turnover or stock prices. Thereby, financial performance is of paramount significance for the financial managers as each firm should generate fair return in order to justify its existence. Another indicator of financial indicators is return on equity. Return on equity measures how efficiently a firm can use the money from shareholders to generate profits and grow the company. Similarly, return on investment is also a financial indicator which measures how much money was made on the investment as a percentage of the purchase price. Thereby, the requirement of the firms to exhibit reasonable financial performance calls for effective and efficient management of the working capital.

Working capital is the excess of current assets over current liabilities; that is, the amount of capital which is available to an organization that is used in carrying out its daily business operations. Working capital is likewise a key strategic management to guarantee the achievement of any firms since it decides its capacity to complete its tasks adequately in order to improve performance, and achieve the financial objective. The importance of managing working capital components (receivables, inventories and payables, cash conversion cycle) of a business efficiently cannot be denied because it seems that it has substantial influence on the success, prosperity, power of profitability and liquidity and serves as the signs of healthiness of business organization of all sizes.

A popular measure of working capital is the cash conversion cycle, that is, the time span between the expenditure for the purchases of raw materials and the collection of sales of finished goods. Deloof found that the longer the time lags, the larger the investment in working capital, and also a long cash conversion cycle might increase profitability because it leads to higher sales. However, corporate profitability might decrease with the cash conversion cycle, if the costs of higher investment in working capital rise faster than the benefits of holding more inventories or granting more trade credit to customers. Another measure of working capital is account receivable. Account receivable is a current asset account, which represents the money to be received by the company, against the goods delivered or services rendered to the customers. In working capital, the receivables are a very important component of current assets and debtors’ collection period or receivables turnover in days which is the average length of time required to convert the firm’s receivables into cash. Account payable is another component of working capital indicating the money owed by the company to suppliers, and appears as a liability in the company’s Balance Sheet. Inventory as a component of working capital is the average time required to convert materials into finished goods and then to sell those goods. This variable helps in evaluating the efficiency in inventory management policy of the firm. If the firms take more time in selling inventory which means inventories are not getting convert into sales, will decrease the profitability of firm. The objective of inventory management is to turn over inventory as quickly as possible without losing sales from stock-outs. It is an important aspect of working capital management because inventories themselves do not earn any revenue. Holding either too little or too much inventory incurs costs. Inventory is generally made up of three elements such as raw materials, work-in-progress (WIP) and finished goods Arnold, (2008).

Globally, working capital is the most important tools that an organization must properly manage because it determines organizational survival. According to Osundina, working capital is a vital element in any organizational setting that requires maximum attention, proper planning and management. As resources available to organizations are scarce, it is of important that the management of an organization’s working capital has a pivotal role to play in the achievement of organizational profitability and overall performance of the organization. Therefore, it is an appropriate to know and understand the impacts of working capital on the financial performance of organization.