CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The growth and survival of any company depends on a number
of factors. Aside from the collection of talented people, working with
the latest technological and mechanical asset, and the performance
of a leader, the appropriate management of the financial factors that
can help the company even if there is an economic crisis is also
important.
Any company aiming to perform well in order to achieve its
long and short term goals and objectives should have a sound and
effective working capital management. The ability of a company to
remain in business for a very long time depends greatly on the
efficient management of the components of its working capital. Thus,
working capital is important to the financial health of any company of
all sizes. This explains the fact that firms with inadequate working
capital are in financial straitjacket.
As the name implies working capital refers to the funds that are
required for the day to day running of the activities of a firm, it is the
excess of current assets over current liabilities. Working capital
management involves the relationship between a firm's short-term
assets and its short-term liabilities. The goal of working capital
management is to ensure that a firm is able to continue its
operations and that it has sufficient ability to satisfy both maturing
short-term debt and upcoming operational expenses. The
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management of working capital involves managing inventories,
accounts receivable and payable, and cash.
Large number of business failure has been attributed to the
inability of financial managers to plan and control the current assets
and current liabilities of their respective Organizations. This explains
why working capital management is vital to firms with limited access
to the long term capital market.
Furthermore, the importance of effective working capital
management cannot be over looked. Having said that working capital
is the live-wire of a business, it is expected that effective provision of
it will ensure greater success of a company while in-effective
management of it will lead to ultimate downfall of what otherwise
might be considered as a prosperous concern.
As a result of the impact of working capital on the overall cost
reduction and profitability of companies, this research is therefore a
study of Working Capital Management as it contribute to cost
reduction and improvement in profitability with particular reference to
Cadbury Nigerian PLC.

1.2 STATEMENT OF THE PROBLEM

Working Capital Management is a managerial accounting
strategy focusing on maintaining efficient levels of both components
of working capital, current assets and current liabilities, in respect to
each other. Generally speaking the immediate problem facing most
financial managers always centers on the best way to ensure suitable
survival of the business as well as its expansion in terms of working

2
capital management.
A firm or company should be in a sound working capital
position. It should have adequate working capital to run its business
operations. One should note that both excessive as well as
inadequate working capital position are dangerous to any business,
therefore a company is required to maintain a balance between
liquidity and profitability which are sometimes conflicting objectives
while conducting its day to day activities. However financial
managers are faced with the major problem of obtaining an optimum
level of working capital, which is a situation whereby working capital
managers are able to avoid the problem of holding idle funds, which
earns no profit for the firm, and inadequate working capital which
reduces the firm's profitability as well as production interruptions and
inefficiencies.
The credit policy of a firm is another bottleneck confronting
working capital management. A flexible credit policy adopted by the
management in most cases results in writing off a high proportion of
bad debts while a rigid credit policy reduces the level of sales and
also scares away customers. Therefore financial managers are faced
with the problem of determining an effective and efficient credit
policy which should be in line with their company’s goals and
objectives.
Fraud is almost in every organization and this is also a big
problem to working capital managers, since working capital
management requires a substantial part of the capital be held in

3
liquid cash so as to run the day today activities of a firm, financial
managers are faced with the task of providing adequate security in
order to prevent embezzle of money meant for the organization.
Working capital policy is one of minimizing committed finance
whereas working capital management is an optimizing process aimed
at filling the minimization policy to operational requirement. This
implies that the inefficient and ineffective management of working
capital will hinder the growth and survival of the Organization.

1.3 RESEARCH QUESTIONS

This study intends to provide answers to the following questions:
i. What are the components of working capital management in
Cadbury Nigeria PLC?
ii. How effective does the working capital management of
Cadbury Nigeria PLC enhances its profitability?
iii. Has Cadbury Nigeria PLC been able to manage its trade
debtors, stock and trade creditors effectively?
iv. Does Cadbury Nigeria PLC has an optimum level of working
capital Management?
v. What are the adverse effects of inefficient management of
working capital on the company?

1.4 RESEARCH HYPOTHESES

The major area of focus of this study is on the effect of working
capital management on profitability. This will form the basis for
formulating the hypothesis which will be tested and validated with a

4
view to making some recommendations.
i. Ho: Working Capital Management of Cadbury Nigeria PLC
does not enhance its profitability.
H1: Working Capital Management of Cadbury Nigeria PLC
enhances its profitability.
ii. Ho: Cadbury Nigeria PLC does not have an optimum level of
Working Capital Management.
H1: Cadbury Nigeria PLC has an optimum level of Working
Capital Management.

1.5 OBJECTIVES OF THE STUDY

An effective and efficient working capital management is
suppose to contribute meaningfully to the development, profitability
and the overall growth of any organization. Due to the importance of
working capital management, this study is aimed at achieving the
following objectives:
i. To identify the various components of working Capital in
Cadbury Nigeria PLC.
i. To evaluate the impact of Working Capital Management the
profitability of Cadbury Nigeria PLC.
iii. To determine whether Cadbury Nigeria PLC managed its trade
debtors, stocks and trade creditors effectively.
iv. To ascertain if Cadbury Nigeria PLC has an optimum level of
Working Capital Management.
v. To evaluate the effect of inefficient management of Working
Capital in Cadbury Nigeria PLC.

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1.6 SIGNIFICANCE OF THE STUDY
This study is generally designed for the benefit of all investors
and owners of manufacturing companies who have not adopted any
policy on working capital management. To the investors and owners
of firms, a good working capital management indicates sound
liquidity position of the company meaning that the company is well
managed, financed and sound. From the research the firm's ability to
finance long and short term liabilities is determined. Since investors
wish to invest, therefore proper study of the firm's working capital
position must not be over looked.
Apart from the above, the study will also highlight certain
problems associated with the management of working capital and
equally give useful information on the possible means of
improvement in the university's library and for other students who
may wish to embark on the research of working capital management
in future.
Finally the general public may find this work useful in areas
where they wish to broaden their knowledge on working capital
management in business organization.

1.7 SCOPE OF THE STUDY

This project is meant to cover the working capital management
in manufacturing companies, with particular reference to Cadbury
Nigeria PLC, however, it is restricted to the general management of
current assets and current liabilities. The study shall cover a period of
five years from 2004 to 2008. Because of the importance working
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capital management, as a tool for cost reduction and improvement in
profitability, the study is been conducted in other to evaluate the
effect of working capital on firm’s profitability.

1.8 LIMITATION OF THE STUDY

Writing a research of this nature could not be without its own
predicaments. Thus the hardships that were encountered include:
Financial constraint, due to the present economic problem, the
researcher was highly constrained by inadequate funds which
hindered him to go extra mile in search of literatures and other
relevant data.
Another limitation was the inability of the researcher to obtain
all relevant information from the company, this is as a result of the
fact that the company cannot give out certain documents which are
tagged as confidential, however the researcher made adequate use
of the available ones in other to make the project a success.

1.9 DEFFINATION OF TERMS

For the purpose of this research the following term are defined
as they were use in the study.
i. Working capital: This is the capital or fund available for
carrying on the day to day operations of an Organization.
ii. Working Capital Management: It refers to the efficient
management of current assets and current liabilities.
iii. Current assets: These are resources that are held or
consumed within a short period of time usually one year. They

7
 include stock, cash, debtors, prepayments etc.
iv. Current liabilities: These are the amounts failing due to
creditors within a year. It includes trade creditors, bank
overdraft, accruals etc.
v. Loan Port Folio: A mixture of shares and bonds held by a firm.
vi. Fixed Asset: Assets, which are not readily convertible into cash
and are acquired for long term usage in the firm, e.g. building,
plant, machine etc.
vii. Inventories: Inventories are stocks of raw materials, works in-
progress and finished goods of a company engaged in
manufacturing operations.
viii. Bankruptcy: Where the firm is unable to meet the payment of
its debts. The company could not pay its debts and therefore
officially declare bankrupt or insolvent.

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 CHAPTER TWO
LITERATURE REVIEW

2.1 CONCEPT OF WORKING CAPITAL

No matter how small a company is, there is need for adequate
funds with which its day to day operations is being pursued and this
becomes imperative (Madufor, 2006). The level of working capital an
organization should maintain in order to maximize its profits has been
the focus of many writers for the past few decades. The term
working capital has been viewed by different people in different
ways. Amanda (2007), describes working capital as the short term
fund required to run a business at a particular turnover level, while
Aborode (2005), defined working capital as the funds invested to
finance production such as purchase of raw materials, inventories
and provide credit to customers. Working capital has also been
described as that portion of capital that oils that wheel of the
business since it gives the Organization the ability to pass through
financial storms.
Padachi (2006), opined that an Organization should ensure a
good synchronization of its assets and liabilities in order to avoid
business closure which poses a serious threat to its survival. To
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maximize the value of the firm has become the most prominent
objectives of most Organization as against other objectives. Thus, a
financial manager of a business entity is in a dilemma of achieving a
desired tradeoff between liquidity and profitability in order to achieve
its objectives. The need to maintain an adequate working can hardly
be questioned, just as circulation of blood is necessary in human
body to maintain life, the flow of funds in an Organization is very vital
to enable it grow and survive.
According to Pandey (1993), there are two concept of working
capital, the gross concept and the net concept. In his definition he
opined that gross working capital simply called working capital is the
firm's investments in current assets while the term net working is
current asset less current liabilities. Mbachu (1988), opined that
working capital is used to denote the excess of current assets over
current liabilities. He went on to say that this excess is sometimes
called net working capital because some businessman considers
current assets as working capital. Osibodu (1990), shared some view
with Mbachu when he said that working capital is the capital available
for conducting the day to day operations of an organization normally
the excess of current assets over current liabilities. However, the two
concept of working capital gross and net are not exclusive, rather
they have equal significance from management view point.
Gross working capital: the gross working capital or current
asset focuses attention on two concepts of current assets
managements which include (a) Optimum investment in current

10
assets and (b) Financial current assets. Gross working capital is the
totality of the current assets of the Organization, which includes
stocks (inventory), debtors, bank and cash balance, short-term
investment etc. The concept of gross working capital advocates that
a firm should posses’ working capital just adequate and sufficient to
meet the firm’s operating cycle. It ensures that excess investment in
cash is avoided, since excess investment in cash results in excess
liquidity, thus resulting to high cost of income. This is otherwise
known as optimal level in current assets. Excess investment in
current assets is avoided.
Net working capital: this is quantified as the excess of total
current assets over total current liabilities. It emphasizes continuous
liquidity of the firm. The concept advocates a finance of working
capital by permanent sources of funds. Examples are shares,
debentures, long-term debts, preference shares, retained earnings
etc.
However, the two concepts Gross and Net Working Capital are
of paramount importance to management. This made Pandey (1993),
to stipulate that both concepts are not exclusive but rather they have
equal significance from management point of view. He was also of
the opinion that there is no precise way to determine the extent of
amount of gross or net working capital for every firm. The data and
problems of each organization should be analyzed to determine the
amount of working capital needed.
The net working capital is a qualitative concept. It indicates the

11
liquidity position of the firm and suggests the extent to which
working capital needs may be financed by permanent sources of
funds. Thus working capital represents the money required for the
purchase of raw materials, payment of salaries, wages and other
expenses and for financing the interval between the data of supply of
goods and data of receipts of payment for those goods.
The consideration for the level of investment in current assets
should avoid two danger points, excessive and inadequate
investment in the current assets. Investment in current asset should
be just adequate, not more or less the needs of the business firms
within the industries. Inadequate amount of working capital can
threaten the solvency of the firm if it fails to meet its current
obligations. It should be realized that the working needs of the firm
may be fluctuating with changing business activities. This may cause
excess or shortage of working capital frequently. The management
should be too prompt to initiate an action and correct the imbalance.
Secondly, the other aspect of the gross working capital points
to the need for arranging funds to finance current assets. Whenever
a need for working capital funds arises due to the increasing level of
business activities or for any other reason the arrangement should be
made quickly. Similarly if some surplus funds arise, they should not
be allowed to remain idle, but should be invested in short term
securities. Thus, the financial manager should have knowledge of the
sources of working capital funds as well as the investment avenues
where the idle funds may be temporarily invested.

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 Finally, it may be emphasized that gross and net concepts of
working capital are two important facets of working capital
management. There is no precise way to determine the exact
amount of gross and net working capital for every firm. The data and
problems of each company should be analyzed to determine the
amount of working capital. There is no specific rule in which current
assets should be determined or financed. It is not feasible in practice
to finance current assets by short term sources only. Keeping in view
the constraints of the individual company a judicious mix of long term
financing should be invested in current assets.

2.2 IMPOTANCEANCE OF WORKING CAPITAL MANAGEMENT

Working capital management is a very important component of
corporate finance because it directly affect the liquidity and
profitability of a company. It deals with current asset and current
liability. Working capital management is important due to many
reasons. For one thing, the current asset of many manufacturing
firms accounts for over half of its total assets. For a distribution
company, they account for even more. Excessive level of current
assets can easily result in a firm realizing a substandard return on
investment. However firm with too few current asset may incur
shortage and difficulties maintaining smooth operations. An efficient
working management involves planning and controlling current
assets and current liabilities in a manner that eliminates the risk of
inability to meet due short term obligation on the one hand and avoid
excessive investment on the other hand. In addition, working capital
13
decision are sensitive in the financial area but the level of different
working capital components becomes frequent, repetitive and time
consuming which makes the working capital part of the firm’s
profitability (Raheman and Nasr, 2007).
There are many aspects of working capital management which
makes it an important function of the financial manager. Working
capital management requires much of financial managers time.
Empirical observation showed that financial managers have to spend
much of their time to the daily internally operations, relating to
current assets and current liabilities of the firm. Because of this it is
necessary to get maximum benefits. The management of working
capital involves the following;
(i.) Provision of funds to finance current assets.
(ii.) Determination of optimum level of working capital to be kept.
(iii.) Specific controls over the individual elements of working capital
stocks, cash debtors and creditors.
Working Capital represents a large portion of the total
investment in assets. Current assets represent more than half the
total assets of business firms, because they represent a large
investment and because this investment tend to be relatively volatile
current assets are worthy of financial managers careful attention.

2.3 THE NEED FOR WORKING CAPITAL

The need for working capital to run the day to day business
activities of a firm cannot be over-emphasized. The fundamental
concept in assessing the working capital needs of an organization is
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the operating cycle of the organization and the firm's sales activities.
The normal operating cycle referred to is the time required for cash
to be converted into inventory, inventory into receivables and
receivables ultimately into cash. In assessing the working capital
needs of an organization, Alex Mbachu assert that, "the longer the
operating cycle, the more financial resources organization needs and
working capital management is concerned with keeping the operating
cycle to its shortest length ". The operating cycle for manufacturing
organization is longer than that of marketing organizations. It should
be noted that the operating cycle per se does not give the amount of
working capital needed but serves as a useful indicator of efficient
utilization of resources.
By using relationship between sales and the relevant items of
working capital an estimate can be obtained of the working capital
required to finance a given level of sales. The only problem here is
that of estimating the satisfactory level of working capital items
required. However, a number of factors influence the working capital
needs of firms. Amongst the factors are: the nature and size of
business, manufacturing cycle, business fluctuation, production
policy, firm's credit policy, availability of credit firm's growth and
expansion activities, profit margin and profit appropriation, price
level, changes and finally operating efficiency of firms.
Furthermore, the need for working capital is directly related to
sales growth. As Sales grow, the firm needs to invest more
inventories and book debts. These need become very frequent and

15
fast when sales grow continuously. The financial manager should be
aware of such needs and finance them quickly.

2.4 PROFIT AS A MEASURE OF FIRMS PERFORMANCE

The primary objective of business is to produce and sell goods
for profit, through the satisfaction of human wants. A business which
does not earn profit cannot stay in the market for a longer period.
The income of enterprise, therefore, must exceed expenditure over a
period of time. Profit is necessary for a company to insure its own
survival, growth and expansion. In the Words of Drucker, “the
problem of any business is not the maximization of profit but the
achievement of sufficient profit to cover the risk of economic
activities and thus to avoid losses”. It is clear from the above
definition that a business enterprise should work for reasonable profit
which should cover its own future risk.
Business organization will also want to maximize their
shareholders wealth and the extent to which this wealth maximized
depends on how much profit is made. Again one of the major
characteristics of a commercial organization is profit motive since
"the earning of profit is after all, usually the main reason why the
business was set up in the first place, and the proprietor will want to
know for various reasons how much profit has been made". The
business organization would want to know its profits for diverse
reasons as to assist it plan ahead, to help it obtain loan from
creditors, to show a prospective buyer or may be, to know its profits
for income tax purposes.
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 From the foregoing it could be seen that the main objective of
a business organization is to make profit and thus it serves as a good
parameter for measuring firms performances.

2.5 COMPONENTS OF WORKING CAPITAL

The components of working capital are generally classified into
two broad categories namely; Current assets and Current liabilities.

2.5.1 MANAGEMENT OF CURRENT ASSETS

William Pickless (1982), defined current assets as those assets
which are made or acquired and merely held for a short period of
time, with a view to sale at a profit in the ordinary course of
business, that is to say they are easily convertible into cash. These
assets includes; Inventory (Stock), Cash, Debtors and Marketable
Securities. Management of current assets involves the problem of
determining the optimum level of investment in cash asset.
i. Management of Inventory
Bealey and Stewart (1981) defined inventory as "the stick of
the product a company is manufacturing for sale and the components
that make up the product". Such inventories are stated as follows;
raw materials, work-in-progress or finished goods awaiting sale.
These inventories provide very crucial links between the
production (Raw materials) and sales (partially processed and
finished goods) efforts of companies by enabling them to offer the
17
best type of customer service at minimum cost. Apart from this
feature, investments in inventories by most companies are usually
substantial and in general accounts for about one third of total
assets". However inventory is considered important from three
perspectives namely; it makes available a balance of inflows and
outflows of stock throughout production period. Secondly, inventory
provides safety stock in case, interruptions in production occur. And
sometimes, production is not entirely meant for immediate
consumption instead a future need is anticipated. In this direction,
inventory is made available to meet future growth needs of a firm.
For these reasons, proper inventory planning is very important and
normally forms part of the budgetary process. Thus, the aim of
inventory management should be to avoid excessive and inadequate
levels of inventories and to maintain sufficient inventory for the
smooth production and sales operations.
ii. Management of Cash
Cash as one of the component of current asset form a crucial
portion of working capital structure of a company. The presence or
absent of cash in a business concern tells how liquid the it is or the
extent of its illiquidity. The management of cash is concerned with
managing the cash flows into and out of the firm, cash flows within
the firm and cash balances held by firms at a point in time. The aim
of cash management is to maintain adequate cash balance in order
to keep the firm sufficiently liquid and to invest excess cash in some
profitable ventures.

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 A company needs to keep sufficient cash to keep its business
running smoothly. Inadequate cash will disrupt the firm’s operation
and can lead to insolvency. According to Olowo (1998), excessive
cash will tie down the unnecessarily long term capital with a result
that either return on capital will be low. Thus, a firm needs to
maintain sound cash position. Generally, a reasonable cash balance is
kept to pay of current liabilities monthly when they fall due.
According to Lord Keynes in Paul A. Samuelson (1989),
business or firms have three primary motives for holding cash, they
include; transaction, precautionary and speculative motives.

Transaction Motives: The transaction motive requires a firm to hold

cash to conduct its business in ordinary course. According to Richard
Lipsey (1993), the transactions demand for money arises because of
the iron synchronization of payments and receipts. Therefore the
transaction motive mainly refers to holding cash to meet anticipated
payments where timing is not properly matched with cash receipts.

Precautionary Motive: Precautionary motive is the need to hold cash

to meet any contingencies in future, whereas the transaction demand
arises from the certainty of non synchronization of payments and
receipts. Lipsey was of the view that, the precautionary demand
arises from uncertainty about the degree of non synchronization. It
provides caution or buffer to withstand unexpected emergency.

Speculative Motive: The speculative motive relates to the holding of

19
cash for investing in profit making opportunities as and when they
arise. Speculation is always made on securities.
Thus, the primary motives to hold cash and marketable
securities are the transactions and precautionary motives. However,
firms must decide the quantum of transactions and precautionary
balances to be held.

iii. Management of Debtors

Debt management otherwise known as management of
account receivable is concerned with the efficient management of
debtors to achieve an optimum level of debt in the firm’s working
capital investment. Managing debtors is a problem of balancing
liquidity and profitability. Planware (2006), asserts that, firms can
significantly enhanced their cash flows if the amounts owed to the
business are collected faster. Thus every business needs to know
who owes them money, how much is owed, how long it is being owed
and for what it is owed.
Debtors include accounts receivables as such its importance to
the firm cannot be over emphasized, this is due to the fact that such
debt are tied down capital and could impact negatively on the liquidity
of the firm. On the other hand, business operations can go
uninterrupted without credit being allowed to customers since it is
necessary as the initial capital needed to start a business. Thus,
sales may be lost or reduced if no credit is allowed to customers
whose paying ability is in little, while too rigid credit policy may lead a
firm into losing its goodwill and customers.
The failure of most organization could be attributed to the
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problem of liquidity arising from extended credit terms and the
resulting cash flow problem. This is as a result of the fact that there is
no sound credit management system which sets the credit limit,
systematic demand procedure, proper legal enforcement method on
the credit extended to customers. The effective and efficient
management of accounts receivable should therefore deal with
establishing viable credit and collection policies. A good policy seeks
to strike a reasonable balance between sales, bad debts and losses.
A collection policy should be designed to keep the level of
investments in receivables at appropriate level.
iv. Management of Marketable Securities
These are securities that can be sold in short notice for close to
their quoted market prices. There is a close relationship between
cash and market securities. Firms sometimes report reasonable
amounts of such short term marketable securities as treasury bills, or
bank certificates of deposit among their current assets. Therefore,
the investment in marketable securities should be properly managed.

2.5.2 MANAGEMENT OF CURRENT LIABILITIES

Current liabilities are obligation that must be paid within the
operating cycle or within one year. Mbachu (1990), termed current
liabilities as principal obligations whose liquidity is reasonably
expected to require the use of existing resources, properly classified
as current assets or the creation of other current liabilities. Current
liabilities include such obligation as account in acquisition of
materials, collection received in advance of delivery of goods or

21
performance of service or debts. In general current liabilities include
the following: Creditors, bank loan and over draft, tax and other
expenses.

i. Management of Creditors
Credit management otherwise known as management of
account payable is concerned with short term credit financing. The
management of trade creditor is the mirror image of the
management of trade debtors. One firm’s trade debtors are another
firm’s trade creditors. Creditors are a vital part of the component of
working capital and should be managed in an efficient and effective
way to enhance the firm’s cash position. A firm in managing its trade
creditors should attempt to obtain satisfactory credit periods from
suppliers. However, care must be taken to maintain good
relationships with regular and important suppliers. This is because a
good supplier is one who will work with you to enhance the future
viability and profitability of a company.
Trade credit as a discount policy is an important source of free
financing. However, if the supplier offers a cash discount and the firm
do not take advantage of it, there is an implied interest cost of credit.
Thus, the management of creditors’ ad suppliers is just as the
management of your debtors. However, a company should avoid
delaying trade credit unnecessary so as not to lose loose supplier’s
goodwill.

ii. Bank Overdraft and Other Short Term Funds

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 A bank overdraft is one of the most common forms of short-
term finance. It is really a loan arrangement whereby a trading bank
allows a business (grants an overdraft facility) to make payments
from its current banking account and put the account into 'debit' up
to an agreed limit. A bank overdraft is part of working capital and is
reported in the position statement as a current liability. It is a flexible
source of finance as it fluctuates according to the firm's needs and
the business can pay in or withdraw cash when convenient. But it
attracts a relatively high interest rate so it should only be used until
the normal trading cycle eliminates the temporary cash shortfall.

iii. Taxation Management

Proper taxation management an organisation contributes to the
financial management performance of the Government. In addition to
minimising the risk of the financial cost of non-compliance, it reduces
negative non-financial impacts, such as adverse publicity or loss of
public confidence in the organisation’s financial management.
Taxation management is closely aligns with risk management. Some
risks associated with poor taxation management include incorrect
treatment of receipts and payments, lost input tax credits, loss of
Agency credibility and impact on Headline Budget Measures.

2.6 WORKING CAPITAL RATIOS

Ratio analysis is the tool with which financial statement are
analyzed. The use of ratios is indispensable if the strengths and
weaknesses or the firm must be ascertained, improved upon and

23
corrected. Osisioma (1990) defined ratio analysis as "the technique of
reducing aggregate financial data into meaningful ratios for the
purpose of obtaining measures of liquidity, solvency, stability and
profitability". John V. (1972) had it that, "ratio analysis is the process
of identifying the financial strengths and weakness of the firm by
properly establishing relationships between the items of the balance
sheet and profit and loss account". Thus financial ratio relates one
set of values to another, with the resulting quietness serving as a
measure, a standard or a room by which performance is judged.
It is useful to classify ratios into four fundamental types with
emphasis on working capital management. Liquidity Ratio: This
measures the firm's ability to meet its maturing short term
obligations. Among these are:
i. Current Ratio: Which indicates the extent to which the claims
of short term creditors are covered by current assets?
ii. Acid Test Ratio: Which measures the firm’s ability to pay off
short term obligations without relying on the sale of
inventories?
iii. Leverage Ratio: This ratio measures the extent to which the
firm has been financed by debt.
iv. Activity Ratio: This measures management overall effectiveness
as shown by the returns generated on sales and investment.
Examples are:
(a) Net profit on sales ratio - which gives profit per naira of
sales.

24
 (b) Rate of Return on assets - which measures the return on
total investments in the firm.
(c) Rate of Return on capital employed - which is an efficiency
guard to show the intensity and profitability of overall capital
usage

2.7 FACTORS AFFECTING WORKING CAPITAL

Firms maintain different levels of working Capital which
invariably influences the level of liquidity position of the organization.
This is as a result of the fact that the level of working capital
requirements in these firms are influenced by many factors and these
are:
i. The Business Environment
The environment of the business represents the total of
surrounding factors which affects the operations of business. The
factors are economic, political, legal, socio–cultural, technological,
customers etc. Example, if the economy is in boom era, the business
might require investment in stocks.
ii. The Nature and Size of the Business
The working capital requirement of a firm is a function of the
nature of such firm which is different from that of another firm. Large
manufacturing firm like Cadbury Nig. Plc require high working capital
due to its carrying a large stock of variety of goods.
iii. Firm’s Credit Policy
The more efficient the company’s credit policy, the lesser the
operating cycle and the lower the working capital required. The credit
25
policy is measured by ability to reduce the operating cycle without
any side effect on the goodwill of the company in terms of
relationship with the customers.
iv. Operating Cycle
All things being equal, the longer the operating cycle, the larger
the working capital required for the period. Hence, reducing the
operating cycle means reduction in the amount of working capital
needed.
v. Price Level Changes
The price of commodities has a direct effect on working capital
needed. During inflationary periods, firms will require not only
investment in fixed assets but also in working capital.
vi. Operating Efficiency
The ability of a company to keep its costs at minimum and
reasonable level means the reduction in working capital needs of
such company. On the other hand, increase in running costs means
increase in working Capital needs of the company.
vii. Business Fluctuation
Movement of sales determines the working capital
requirements of the company. There are some festive periods when
demand increase also the working capital needed to meet this
demand will increase.

2.8 STUDIES ON WORKING CAPITAL

Many researchers have studied working capital from different
views and in different environments. The following ones were very
26
interesting and useful for this research.
Eljelly (2004), elucidated that efficient liquidity management
involves planning and controlling current assets and current liabilities
in such a manner that eliminates the risk of inability to meet due
short-term obligations and avoids excessive investment in these
assets. The relation between profitability and liquidity was examined,
as measured by current ratio and cash gap (cash conversion cycle)
on a sample of joint stock companies in Saudi Arabia using
correlation and regression analysis. The study found that the cash
conversion cycle was of more importance as a measure of liquidity
than the current ratio that affects profitability. The size variable was
found to have significant effect on profitability at the industry level.
The results were stable and had important implications for liquidity
management in various Saudi companies. First, it was clear that
there was a negative relationship between profitability and liquidity
indicators such as current ratio and cash gap in the Saudi sample
examined. Second, the study also revealed that there was great
variation among industries with respect to the significant measure of
liquidity.
Deloof (2003) discussed that most firms had a large amount of
cash invested in working capital. It can therefore be expected that
the way in which working capital is managed will have a significant
impact on profitability of those firms. Using correlation and regression
tests he found a significant negative relationship between gross
operating income and the number of days accounts receivable,

27
inventories and accounts payable of Belgian firms. On basis of these
results he suggested that managers could create value for their
shareholders by reducing the number of days’ accounts receivable
and inventories to a reasonable minimum. The negative relationship
between accounts payable and profitability is consistent with the view
that less profitable firms wait longer to pay their bills.
Ghosh and Maji (2003), in their paper made an attempt to
examine the efficiency of working capital management of the Indian
cement companies during 1992–1993 to 2001–2002. For measuring
the efficiency of working capital management, performance,
utilization, and overall efficiency indices were calculated instead of
using some common working capital management ratios. Setting
industry norms as target-efficiency levels of the individual firms, this
paper also tested the speed of achieving that target level of efficiency
by an individual firm during the period of study. Findings of the study
indicated that the Indian Cement Industry as a whole did not perform
remarkably well during this period.
Shin and Soenen (1998), highlighted that efficient Working
Capital Management (WCM) was very important for creating value for
the shareholders. The way working capital was managed had a
significant impact on both profitability and liquidity. The relationship
between the length of Net Trading Cycle, corporate profitability and
risk adjusted stock return was examined using correlation and
regression analysis, by industry and capital intensity. They found a
strong negative relationship between lengths of the firm’s net trading

28
Cycle and its profitability. In addition, shorter net trade cycles were
associated with higher risk adjusted stock returns.
Smith and Begemann, (1997) emphasized that those who
promoted working capital theory shared that profitability and liquidity
comprised the salient goals of working capital management. The
problem arose because the maximization of the firm's returns could
seriously threaten its liquidity, and the pursuit of liquidity had a
tendency to dilute returns. This article evaluated the association
between traditional and alternative working capital measures and
return on investment (ROI), specifically in industrial firms listed on
the Johannesburg Stock Exchange (JSE). The problem under
investigation was to establish whether the more recently developed
alternative working capital concepts showed improved association
with return on investment to that of traditional working capital ratios
or not. Results indicated that there were no significant differences
amongst the years with respect to the independent variables. The
results of their stepwise regression corroborated that total current
liabilities divided by funds flow accounted for most of the variability in
Return on Investment (ROI). The statistical test results showed that
a traditional working capital leverage ratio, current liabilities divided
by funds flow, displayed the greatest associations with return on
investment. Well known liquidity concepts such as the current and
quick ratios registered insignificant associations whilst only one of the
newer working capital concepts, the comprehensive liquidity index,
indicated significant associations with return on investment.

29
 All the above studies provide us a solid base and give us idea
regarding working capital management and its components. They
also give us the results and conclusions of those researches already
conducted on the same area for different countries and environment
from different aspects. On basis of these researches done in different
Countries, we have developed our own methodology for research.

2.9 HISTORICAL BACKGROUND OF CADBURY NIGERIA PLC

Cadbury Nigeria Plc is a leading company in confectionary, food
drink and food products whose quality and brands are enjoyed
throughout the entire nation as well as in our export markets around
the world. The origin of the business stretches back to the 50’s, first
as an activity to source cocoa beans, while simultaneously
prospecting for opportunities to serve the local consumers with the
famous Cadbury products.
An initial packing operation established in the early 60’s to pack
imported bulk consumer products grew rapidly into a full-fledged
manufacturing outfit. The company was incorporated in January 1965
when the current four (4) hectare factory site was also opened and
subsequently went public in 1976.
The philosophy of the business from inception was to build and
sustain a solid foundation for providing functional and affordable
products that help enhance the quality of life of consumers, while
developing a mutually beneficial relationship with the wider
community in which it operates. This heritage of caring has been the
underlying principle that governs their relationship with consumers,
30
customers, shareholders, suppliers, employees and society at large;
as well as the company’s policies on the environment, corporate
governance, ethical trading, human rights, safety at work, diversity
and equal opportunity employment practices.
These carefully nurtured traditions enabled the company
provide brands, products, financial results and manpower capacity of
less than 200 to over 2000 employees who have chosen to make a
career in Cadbury. They are the embodiment of talents, skill,
knowledge and other intelligent property behind the success of the
business.
Today, Cadbury has a broad portfolio of well established
product many of which were developed locally. These include:
Cadbury Bourn vita (The lead brand), Richoco (Rich chocolate drink),
Tom-Tom (big black sweet with white stripe), Trebor Peppermint
Original (TPO), Butter mint, malta sweet and a host of others.
As part of their effort to use local raw materials as much as
possible, their pioneering cereal conversion plant processes nearly
30,000 tons of sorghum grains annually, into glucose and malt
extract primarily to feed the confectionary and food drinks plant.
Cadbury also made a major investment to establish a cocoa
performance that meets the interests of their numerous stakeholders.
A rising profile of performance, driven by a robust business model
also means increasing taxes to Government.

31
 CHAPTER THREE
RESEARCH METHODOLOGY

3.1 METHOD OF DATA COLLECTION

Data for this study were collected from both primary and
secondary sources. The secondary source constituted of existing
literature and data extracted from the Annual Reports and Accounts
of Cadbury Nigeria PLC mainly the profit and loss and balance sheet
statements for five years period from 2004 to 2008 were used in
32
gathering financial data and computing various ratios used in
answering the research questions and testing the hypotheses.
For the purpose of gathering information that could not be
obtained through the secondary data, the primary source of data
collection was employed using basically the questionnaire. The
questionnaire consists of a set of questions designed by the
researcher in relation to the research topic and administered to all
the relevant personnel involved in the administration of the company
working capital. A total number of forty (40) questionnaires were
distributed to the staff of the company drawn from both the senior,
middle and junior level staffs. The reason for using the questionnaire
was to enable the researcher to collect information that could not be
obtained from the Annual Accounts of the company.

3.2 METHOD OF DATA ANALYSIS

In the presentation of data collected, the use of tables will be
employed. The method of data analysis for this research will be the
use of simple percentages and ratio analysis. The reason for using
this method is to enable the researcher compare and group
information and data accordingly. The computation of ratios shall be
limited to those that have to do with working capital of the company.
These ratios include:
Current ratio = Current Assets
Current Liabilities

Acid test ratio = Current Assets - Stock

33
 Current Liabilities

Stock Turnover = Closing Stock x 365

Sales

Debtors collection period = Trade Debtors x 365

Sales

Creditors payment period = Trade Creditors x 365

Cost of sales

Returns on working capital = Profit before interest and tax x 100

Working Capital

In testing the hypotheses, two statistical techniques will be

used, that is the Correlation coefficient and the Chi-square statistical
technique. Hypothesis one (H1) will be tested using correlation
coefficient (r) in order to test the relationship between working
capital and profitability. The formula is given as:

r= ∑xy -∑x(∑y)
[n∑x - (∑x)2] [n∑y2 - (∑y)2]
2

While Hypothesis two (H2) will be tested using Chi-square statistical

technique in order to test the optimum level of working capital
management in Cadbury Nigeria PLC.
The formula is given by:
Xc2 = (O – E)2
E

Where: Xc2 = Calculated Chi-square

O = Observed frequency

34
 E = Expected frequency derived by (CT)(RT)
GT

Where: CT = Column total

RT = Row total
GT = Grand total
This tool will be applied by checking the corresponding chi-square
table (Xt2) with the degree of freedom calculated as (r-1)(c-1) under
5% level of significance.

CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS

4.1 DATA PRESENTATION

As earlier stated in chapter three, there are two types of data
collected for the purpose of this study, that is, the primary and the
secondary data. However the presentation of data will only focus on
the secondary data while the primary data will be presented along
with its analysis under the data analysis subsection.
Five research questions were formulated in this study, all
35
directed towards determining the effect of working capital
management on the profitability of Cadbury Nigeria PLC. The first
three (3) research questions will be answered using the secondary
data obtained from Cadbury Nigeria PLC annual account from 2004 to
2008, while the other two (2) research questions will be answered
using the primary data obtained through questionnaire. The following
secondary data presented below constitute the working capital
variables, they helped to highlight the working capital position of the
firm.

4.1.1 Components of working capital in Cadbury Nigeria PLC

There are two components of working capital in Cadbury
Nigeria PLC, they include the current assets and the current liability.
These components of working capital are presented in the tables
below.

Table 4.1: Current Assets

Years Stock Debtors Prepayment Due from Bank & Total
Subsidiary Cash
N’m N’m N’m N’m N’m N’m
2004 4,911 5,029 32 773 2,661 13,407
2005 4,901 9,130 190 470 7,699 22,390
2006 6,174 3,055 16 1,480 2,879 13,604
2007 2,293 1,361 85 1,570 2,056 7,365
2008 2,951 2,397 59 813 1,554 7,774

36
Source: Annual Accounts of Cadbury Nig. PLC (2004-2008). *(N‘m) All values in billions

Table 4.1, shows the current asset of Cadbury Nigeria PLC for
the five years starting from 2004 to 2005. It also shows the
constituents of the company’s current assets which include stocks,
debtors, prepayment, and amount due from subsidiary and cash in
hand and at bank.

Table 4.2: Current Liabilities

Years Bank overdraft Trade Taxation Other Total
Borrowing Creditors Liabilities
N’m N’m N’m N’m N’m
2004 2,029 2,023 545 4,419 9,019
2005 5,528 2,623 750 3,981 12,882
2006 16,570 2,447 7 3,433 22,457
2007 15,075 1,399 7 3,985 20,466
2008 15,150 1,715 1 5,336 22,202
Source: Annual Accounts of Cadbury Nig. PLC (2004-2008). *(N‘m) All values in billions

Table 4.2, shows the current liability of Cadbury Nigeria PLC for
the five years starting from 2004 to 2005. It also shows the
constituents of the company’s current liability which include bank
overdraft and short term borrowing, trade creditor, taxation, and
other liabilities which include accruals and dividend payable.

4.1.2 Relationship between working capital and profitability

In determining the relationship of working capital management
on the profit of Cadbury Nigeria PLC, the Working capital of the
company and Profit Before Interest and Tax (PBIT) will be used in
computing the correlation in order to ascertain the type of

37
relationship that exist between them.
Table 4.3: Computation of working capital
Years 2004 2005 2006 2007 2008
N’m N’m N’m N’m N’m
Current 13,407 22,390 13,604 7,365 7,774
Asset
Current (9,016) (12,882) (22,457) (20,466) (22,202)
Liability
Working 4,391 9,508 (8,853) (13,101) (14,428)
Capital
Source: Annual Accounts of Cadbury Nig. PLC (2004-2008). *(N‘m) All values in billions

Table 4.3 shows the computation of working capital in Cadbury

Nigeria PLC. As it can be seen the working capital of the company in
2004 and 2005 were in a positive position. This indicates that the
company was able to settle its immediate obligations. However in
2006, 2007 and 2008 the company’s working capital were in a
negative position making it difficult for the company to meet its
immediate obligations.

Table 4.4: Working capital and PBIT

Years 2004 2005 2006 2007 2008
N’m N’m N’m N’m N’m
PBIT 3,891 3,937 (1,841) (2,461) (1,320)

Working 4,391 9,508 (8,853) (13,101) (14,428)

capital
Source: Annual Accounts of Cadbury Nig. PLC (2004-2008). *(N‘m) All values in billions

Table 4.4, shows the Profit Before Interest and Tax compared
38
with working capital of the company. The PBIT in 2005 was a bit
higher than that of 2004, but from 2006 to 2008 the company made
losses. Looking at the PBIT compared to the working capital, it can
be easily seen that when the PBIT of the company were positive the
working capital were positive but when the PBIT were negative the
working capital of the company were also negative.

4.1.3 Management of Stocks, Debtors and Creditors

In other to determine if the company is utilizing its recourses
efficiently, the efficiency ratios will be computed, these ratios include
stock turnover, debtor’s collection period and creditor’s payment
period. The following are the data to be used in computing the ratios.

Table 4.5: Management of Stock

Years 2004 2005 2006 2007 2008
N’m N’m N’m N’m N’m
Stock 4,911 4,901 6,174 2,293 2,951
Sales 20,084 27,444 16,298 18,018 21,727
Source: Annual Accounts of Cadbury Nig. PLC (2004-2008). *(N‘m) All values in billions

Table 4.5, shows the stocks and the sales value of the
company. These data will be employed in calculating the stock
turnover ratio and the number of days stocks are held in the
company.

Table 4.6: Management of Debtors

Years 2004 2005 2006 2007 2008
N’m N’m N’m N’m N’m

39
Trade 5,029 9,130 3,055 1,361 2397
Debtors
Sales 20,084 27,444 16,298 18,018 21,727
Source: Annual Accounts of Cadbury Nig. PLC (2004-2008). *(N‘m) All values in billions

Table 4.6, shows the trade debtors and the sales value of the
company. These data will be employed in calculating the number of
days it takes for the company to collect money from its debtors.

Table 4.7: Management of Creditors

Years 2004 2005 2006 2007 2008
N’m N’m N’m N’m N’m
Trade 2,023 2,623 2,447 1,399 1,715
Creditors
Cost of 12,265 17,465 9,983 13,445 15,021
Sale
Source: Annual Accounts of Cadbury Nig. PLC (2004-2008). *(N‘m) All values in billions

Table 4.7, shows the trade creditors and the cost of sales value
of the company. These data will be employed in calculating the
number of days it takes the company to pay its creditors.

4.2 DATA ANALYSIS (SECONDARY DATA)

In analyzing the secondary data, percentages and financial
ratios will be computed and thereafter the interpretation shall follow.
The reason for using this method was because, financial ratio is
largely concerned with the efficiency and electiveness of resources
utilization by the company's management and also with the financial
stability of the company.

4.2.1 Component of Working Capital Analysis

40
 The percentage of individual working capital components of
Cadbury Nigeria PLC are computed below together with their
interpretation starting with current assets.
Table 4.8: Current Assets Analysis (%)
Years Stock Debtors Prepayment Due from Bank & Total
Subsidiary Cash
% % % % % %
2004 36.6 37.5 0.2 5.8 19.9 100
2005 21.9 40.8 0.9 2.1 34.3 100
2006 45.4 22.5 0.1 10.9 21.1 100
2007 31.1 18.5 1.2 21.3 27.9 100
2008 38 30.8 0.8 10.4 20 100
Source: Computed from Table 4.1

The table above shows the percentages of various items that

make up the current asset of the company. The table shows that
Cadbury Nigeria PLC in 2004 and 2005 held most of its current asset
in debtor’s value representing 37.5% and 40.8% respectively. While
in 2006, 2007 and 2008, the majority of the current asset value was
held in stocks, which represent 45.4% in 2006, 31.1% in 2007 and
38% in 2008.
Prepayment was 0.2% in 2004, increase in 2005 to 0.9%,
however in 2006 it reduce to 0.1% but in 2007 the value increased to
1.2% and finally reduced to 0.8% in 2008. Prepayment has the
lowest proportion of current asset in all the five years under review.
The proportion of the amount due from subsidiaries was 5.8% in
2004, reduced to 2.1% in2005, increased to 21.3% in 2007 and later
reduced to 10.4 in 2008.
41
 The proportion of cash in hand and bank were held moderately
in all the years under review, 2004 had the lowest proportion with
19.9%, while 2005 had the highest proportion with 34.3% of current
asset.

Table 4.9: Current Liabilities Analysis (%)

Years Bank overdraft Trade Taxation Other Total
& Borrowing Creditors Liabilities
% % % % %
2004 22.5 22.4 6.1 49 100
2005 42.9 20.4 5.8 30.9 100
2006 73.7 10.9 0.1 15.3 100
2007 73.6 6.8 0.1 19.5 100
2008 68.2 7.7 0.1 24 100
Source: Computed from Table 4.2

Table 4.9, shows the current liabilities of the company which

consist of bank overdraft and other short term borrowing, trade
creditors, taxation and other liabilities. Looking at the table closely, it
can be seen that Cadbury Nigeria PLC has 49% of its current asset in
2004 in other liabilities which has the highest proportion of current
asset in that year, while taxation has the lowest proportion with
6.1% for 2004.
In the years 2005, 2006, 2007 and 2008, bank overdraft and
other short term borrowing has the highest proportion with 42.9%,
73.7% 73.6% and 68.2% respectively. Trade creditors was 22.4% in
2004, reduced slightly to 20.4% in 2005, however in 2006 it further
reduce to10.9%, the proportion reduce to 6.8% in 2007 and finally
increase a little in 2008 to 7.7%.
42
 Taxation in 2004 and 2005 were 6.1% and 5.8%, while in
2006, 2007 and 2008, the proportion of tax were not up to one
percent of the company’/s current liabilities, this might be as a result
of the losses the company made those three years.

4.2.2 Liquidity Ratio Analysis

The liquidity ratio tries to assess the liquidity or solvency
position of a company. In analyzing the liquidity position of Cadbury
Nigeria PLC, the current ratios, acid test ratios and returns on
working capital will be computed.

Table 4.10: Current Ratio

Years 2004 2005 2006 2007 2008
Current Ratio 1.5:1 1.7:1 0.6:1 0.4:1 0.3:1
Source: Computed from Table 4.1 and 4.2

Current ratio compares total asset and total liabilities and is

intended to indicate whether there are sufficient short term assets to
meet the short term liabilities. A glance at the ratios between the
periods under review portrayed poor working capital management.
This was because the company’s current assets over the years under
reviews were below the industry average of 2 times the current
liabilities. In fact, in 2006, 2007 and 2008, the current liabilities were
more than the current assets of the company. This might be as a
result of the company over investing its liquid resources in illiquid

43
assets, such that cash and near cash resources were so depleted that
maturing business obligations could not be met.

Table4.11: Acid Test

Years 2004 2005 2006 2007 2008
Acid Test 0.94:1 1.36:1 0.33:1 0.25:1 0.22:1
Source: Computed from Table 4.1 and 4.2

The acid test ratio indicates the ability of the company to met
its short term liabilities from its current assets without having to sell
inventories. The ratio gives a better view of the liquidity position of a
company since inventories are said to be the least liquid of a firm's
current assets and the assets on which losses are likely to occur in
event of liquidation. Table 4.11, showed the tabulated values of the
acid test ratios. Unlike the current asset already analyzed the acid
test ratios shows, that it was only in 2005 that the company’s current
asset (less inventories) was a bit higher than the current liabilities,
while in 2004, 2006, 2007 and 2008 the company’s credit worthiness
would be endangered as it might not be able to meet emergency
payments of its short-term liabilities, because of the bad acid test
ratios.

Table4.12: Returns on Working Capital

Years 2004 2005 2006 2007 2008
% % % % %
Returns on 88.61 41.41 20.8 18.78 9.15
Working
Capital
Source: Computed from Table 4.4

Returns on Working Capital show the relationship between

44
working capital and profitability (PBIT). Table 4.12 indicates that the
returns on working capital was 88.67% in 2004, it reduce to 41.41%
in 2005, it reduced again to 20.8% in 2006, there was also a further
reduction in 2007 to 18.78% hand finally reduced to 9.15% in 2008.

4.2.3 Efficiency Ratio Analysis

The efficiency ratios indicate the efficient utilization and
management of a company’s recourses. The efficiency ratios to be
computed include stock turnover, debtors’ collection period and
creditor’s payment period.

Table 4.12: Stock Turnover and Days Held

Years 2004 2005 2006 2007 2008
Stock Turnover 4 times 6 times 3 times 8 times 7 times
(Times)
No. of Days 89 days 65 days 138days 46days 50 days
stock is Held
Source: Computed from Table 4.5

Stock turnover measures the number of times stock is

replenished in an accounting period, it can also be expressed as
number of days stock is held. The higher the times stock is been
turned over the lower the number of days it takes to hold stock. The
no. of time stock was turnover in 2004 was 4 times which took 89
days to hold the stock, while in 2005 stock was turnover 6 time,
taking 65 days, in 2006 stock turnover was only 3 times, representing

45
the highest no. of days stock were held before sales in the years
under review. 2007 indicates that stock were turned over 8 times
which represent the lowest no. of days stock were held, while in
2008 stock were turned over 7 times. The above table shows that in
2006 the company did not sell much of its product, while in 2007 the
company had its highest sell during the years under review.
Table 4.13: Debtors Collection period
Years 2004 2005 2006 2007 2008
Debtors 91 days 121days 68 28days 40days
Collection period days
Source: Computed from Table 4.6

Debtors collection period indicate how efficient is the company

at controlling its debtors. Table 4.13 shows that in 2004 was 91 days;
in 2005 was 121 days. It was 68 days in 2006, 28 days in 2007, while
in 2008 was 40 days. The analysis indicates that Cadbury Nigeria PLC
has not really managed its debtor very well in 2004, 2005, 2006 and
2008. It was only in 2007 that the company had a good control over
its debtors.
Table 4.14: Creditors’ Payment period
Years 2004 2005 2006 2007 2008
Creditors’ 91 days 55 days 89 days 38 days 42days
payment period
Source: Computed from Table 4.7

Creditor’s payment period measures how many credit days is

receive from suppliers. In 2004 there was a payment period of 91
days, 2005 had 55 days payment period, 89 days period in 2006,
while in 2007 and 2008 were 38 days and 42 days payment period
respectively. According to this result it can be said that the company
46
does not manage its creditor effectively and this may impede further
credit facilities from the creditors.
4.3 DATA ANALYSIS (PRIMARY DATA)
The primary data analyzed under this chapter were draw
mainly from the questionnaires distributed. The research questions
are presented below starting from the bio-data of the respondent.
4.3.1 Bio-data of the Respondents
Table 4.15: Gender
Gender No. of Responses Percentage (%)
Male 23 64
Female 13 36
Total 36 100
Source: Administered Questionnaire, 2010.

Out of the total number of the respondent, 64% of them are

males, while 36% of them are females. These indicate that most of
the respondents are males.

Table4.16: Current Level Held

Respondent Level No. of Respondent Percentages (%)
Executive Staff 7 19
Senior Staff 18 50
Junior Staff 11 31

Total 36 100
Source: Administered Questionnaire, 2010.

Table 4.16, shows that majority of the respondent are senior

staffs, representing 50%, executive staffs represent 19%, while 31%
of them are junior staffs. This signifies that at least more than half of

47
the respondents are senior and executive staffs making their
responses very pertinent. Although 31% of the respondent are junior
staffs, their views are also important to this study since they are all
staff of the company.

Table 4.17: Years of Experience in the company

Years of Experience No. of Respondent Percentages (%)
0 -1 year 4 11
1 - 5 years 13 35
5 - 15 years 9 26
15 years - above 10 28
Total 36 100
Source: Administered Questionnaire, 2010.

Table 4.17 shows that 11% of the respondents have below one
year experience, 35% have above one year but less than five years
of experience, 26% have below fifteen years of experience and 28%
of them have above fifteen years of experience. This signifies that
most of the respondents have well developed mind and experiences
necessary to provide an opinion on this study.

Table 4.18: Department or Section

Department No. of Respondent Percentages (%)
Finance and Accounts 24 67
Marketing Department 4 11
Production Department 8 22
Total 36 100
Source: Administered Questionnaire, 2010.

The above table indicates that majority of the respondents

48
representing 67% are staffs working in finance and account
department, 11% work in the marketing department, while 22%
work in production department. This shows that all the respondent
are staffs working in the company and at least 24 of them are in the
finance and accounting department who are directly involve in the
management of working capital, thus marking their responses
imperative.

Tabra4.19: Educational Background

Department No. of Respondent Percentages (%)
OND 11 31
HND 5 14
[Link]. 12 33
[Link]. 6 17
[Link]. 2 5
Others 0 0
Total 36 100
Source: Administered Questionnaire, 2010.

Table 4.19, shows that majority of the respondents are B. Sc.

holders, representing 33%, OND holders followed by 31%, while

49
holders of M. Sc. are 17% and 5% of them are [Link] holders. There
was no respondent with other qualification not mentioned in the
questionnaire.
The above tables in relation to the bio-data of the respondents
signifies that all the respondents have well developed minds,
experience and are matured enough to answer questions relating to
the issue of working capital management.

4.3.2 Level of Working Capital Management

The following questions were asked in respect to this research
question.
Question 6: The importance of effective and efficient working
capital management has been fully appreciated by your company.
Table 4.20: Response to question 6
Responses No. of Respondent Percentages (%)
Strongly agree 16 45
Agree 12 33
Disagree 5 14
Strongly disagree 3 8
Total 36 100
Source: Administered Questionnaire, 2010.

The above table shows that, 45% of the respondents strongly

agree, and 33% agree that the company has fully appreciated the
importance of effective working capital management. However only
14% of the respondents disagree and 8% strongly disagree that the
company has not really appreciates the importance of effective
working capital management. The above table shows that
50
management of Cadbury Nig. PLC takes into consideration the import
of effective working capital management.

Question 7: Cadbury Nigeria PLC as a manufacturing company

maintains an optimum level of working capital in her daily operations.

Table 4.21: Response to Question 7

Responses No. of Respondent Percentages (%)
Strongly agree 7 19
Agree 12 33
Disagree 10 29
Strongly disagree 7 19
Total 36 100
Source: Administered Questionnaire, 2010.

In table 4.21, respondents representing 19% strongly agree

and 33% of them agreed that Cadbury Nigeria PLC maintains an
optimum level of working capital in her daily operations. While 48%
of them representing 29% who disagree and 19% who strongly
disagree that Cadbury Nig. PLC does not maintain an optimum level
of working capital. In conclusion we can say that Cadbury Nig. PLC
does not have an efficient level of working capital. However they try
as much as possible to attain at least an average level of working
51
capital in their daily operation.

Question 8: An optimum level of working capital impacts on the

profitability of the company

Table 4.22: Response to Question 8

Responses No. of Respondent Percentages (%)
Strongly agree 9 25
Agree 17 47
Disagree 8 22
Strongly disagree 2 6
Total 36 100
Source: Administered Questionnaire, 2010.

Table 4.22, indicates that 72% of the respondents consisting of

25% who strongly agree and 47% who agreed that a good working
capital management impacts positively on profitability. While only
28% of the respondents disagreed that working capital management
do not any impact on profitability. It could be concluded that working
capital, when managed properly helps in cost reduction and increase
in profitability of the company along with other factors.

Question 9: Working Capital Management in an effective tool in

52
evaluating the performance of your company
Table 4.23: Response to Question 9
Responses No. of Respondent Percentages (%)
Strongly agree 5 14
Agree 16 44
Disagree 10 28
Strongly disagree 5 14
Total 36 100
Source: Administered Questionnaire, 2010.

The above table shows that 59% of the respondents are of the
opinion that working capital serve as an effective tool for measuring
performance of a company. However 41% of them disagreed that
working capital is not a good tool for measuring a company’s
performance. The reason why there were many respondents that
disagreed might be due to the fact that working capital management
contributes just a little to progress of a company, other factors
should be also considered when measuring a company’s
performance.

Question 10: Cadbury Nigeria PLC prefer short term financing to

long term financing of current assets
Table 4.24: Response to Question 10
Responses No. of Respondent Percentages (%)

53
Strongly agree 9 25
Agree 11 30
Disagree 10 28
Strongly disagree 6 17

Total 36 100
Source: Administered Questionnaire, 2010.

Table 4.24, indicates that 25% of the respondents strongly

agree that Cadbury Nigeria PLC prefer short term financing to long
term financing of current assets, 31% of them agreed, while 29% of
them are of the opinion that Cadbury Nigeria PLC prefer long term
financing instead short term financing of current assets, while 17% of
them strongly disagreed. Based on this responses, Cadbury Nigeria
PLC prefer short term financing to long term financing of current
assets since more than 50% of the respondents agreed.

4.3.3 Effect of Inefficient Working Capital Management

The following questions were asked in respect to this
research question.
Question 11: Cadbury Nigeria PLC encounters difficulties in the
efficient and effective management of its working capital
components.
Table 4.25: Response to Question 11
Responses No. of Respondent Percentages (%)

54
Strongly agree 13 36
Agree 9 25
Disagree 10 29
Strongly disagree 4 10
Total 36 100
Source: Administered Questionnaire, 2010.

Table 4.25, indicates that 36% of the respondents strongly

agree that Cadbury Nigeria PLC encounters difficulties in the efficient
and effective management of its working capital components, while
25% of them agreed. 29% of the respondents disagreed and 10% of
them strongly disagreed that Cadbury Nigeria PLC does not
encounters difficulties in management of its working capital
components.

Question 12: How will you assess the effectiveness of the

company’s working capital management towards the need for cost
reduction and increase in profit

Table 4.26: Response to Question 12

Responses No. of Respondent Percentages (%)
Very Good 2 6
Good 13 35
Fair 21 59
Poor 0 0
Total 36 100
Source: Administered Questionnaire, 2010.

Table 4.26, shows that 59% of the respondents were of the

55
opinion that effective working capital management has been fair in
contributing to the efficiency of the company, 35% said good while
6% said very good. Based on this, the company fairly manages its
working capital. This contributed to the more reason why there has
been little increase in the profit of the company as shown in financial
statement.

Question 13: Has your company ever experience lack of funds to

meet its immediate obligation.
Table 4.27: Response to Question 13
Responses No. of Respondent Percentages (%)
Yes 26 72
No 10 28
Total 36 100
Source: Administered Questionnaire, 2010.

From the data above, it is crystal clear that 72% of the

respondents agree that the Organization has never experienced lack
of funds to meet its immediate obligation, while 28% of the
respondents were indifferent.
Question 14: What factor do you think militate against effective
management of working capital components in your company?
Many responses were obtained from this question. However,
most common among them are provided below:
i. Official corruption and bribery.
ii. Government policies like sudden ban on importation of
resources.
iii. Interference in management decision by the board.

56
iv. Imposition of taxes, inflation
v. Quality and integrity of staffs.

Question 15: What are the immediate impacts of inefficient

management of working capital in your company?
The following were some of the immediate effect of inefficient
management of working capital in Cadbury Nig. PLC mentioned by
the respondents.
i. Operating inefficiency occurs due to difficulties in meeting
day to day commitment.
ii. Inefficient utilization of assets due to lack of working funds,
thus, lowering the rate of returns on investment.
iii. Attractive credit opportunities may be loss due to paucity of
working capital.
iv. Excess of working capital may result in unnecessary
accumulation of inventories increasing the chances of
inventory mishandling, waste and theft.
v. Excessive working capital may make management
complacent, leading to managerial inefficiencies.

4.4 HYPOTHESES TESTING

As earlier stated, two set of hypotheses were formulated.
Hypothesis one will be tested using Correlation coefficient, while
hypothesis two will be tested using Chi-square statistical technique.
The hypotheses are formulated under the NULL (H o) and
ALTERNATIVE (H1) hypothesis so that the researcher will be objective

57
and consistent in his decision on whether to accept or reject the
hypothesis as the case may be.

4.4.1 Hypothesis One

Hypothesis one will be tested using the correlation coefficient
statistical technique in other to measure the linear relationship
between working capital and profitability. The hypothesis is restated
as follows:
Ho: Working Capital Management of Cadbury Nigeria PLC does not
enhance its profitability.
H1: Working Capital Management of Cadbury Nigeria PLC
enhances its profitability.
Table 4.28: Contingency Table for Hypothesis One
Year 2004 2005 2006 2007 2008
N’m N’m N’m N’m N’m
PBIT (X) 3,891 3,937 (1,841) (2,461) (1,320)
Working 4,391 9,508 (8,853) (13,101) (14,428)
capital (y)
Source: Computed from Table 4.4

In the table above, Profit Before Tax and Interest (PBIT)

represent the dependent variable, while Working capital represent
the independent variable. Using the correlation coefficient (r) in
measuring the relationship between these variables, the result obtain
is r= 0.7005.
Decision:
Since the calculated correlation coefficient (r) is greater than 0 but
less than 1, then the null hypothesis is rejected while the alternative

58
hypothesis is accepted which state that working capital management
of Cadbury Nigeria PLC enhances its profitability.

4.4.2 Hypothesis Two

To test the hypothesis which states that Cadbury Nigeria PLC
has an optimum level of Working Capital Management? We applied
chi-square distribution statistics. The hypothesis is restated as
follows:
Ho: Cadbury Nigeria PLC does not have an optimum level of
Working Capital Management.
H1: Cadbury Nigeria PLC has an optimum level of Working
Capital Management.

Table 4.29: Contingency Table for Hypothesis Two

Responses Question(6) Question(7) Question(8) Question(9) Total
Strongly 16 7 9 5 37
Agree
Agree 12 12 17 16 57
Disagree 5 10 8 10 33

59
Strongly
Disagree 3 7 2 5 17
Total 36 36 36 36 144
Source: Administered Questionnaire, 2010.

Degree of Freedom
(4-1) (4-1) = 9 degree of freedom
The value of chi-square table X2t under 9 degree of freedom at 5%
level of significance is 16.919
Therefore:
Value of chi-square calculated (X2c) = 14.3895
Value of chi-square table (X2t) = 16.919
Decision:
Since the value of (X2c)is less than the value of (X 2t), the null
hypothesis is accepted and the alternative hypothesis is rejected.
Therefore, Cadbury Nigeria PLC does not have a good Working
Capital Management.

4.5 SUMMARY OF FINDINGS

From the presentation and analysis of data, it is necessary to
give a clear and concise summary of findings base on the results
obtain.
The component working capital analysis shows that stocks had
the highest percentage of current asset, this indicate that the
60
company may not be too liquid in the short run. Bank overdraft and
short term borrowing on the other hand took the highest percentage
of current liabilities in most of the years in review.
In determination the liquidity positions of Cadbury Nigeria PLC,
it was found out that the current ratio and the acid test ratio of the
company was not favorable and did not show good management.
This was because the ratios over the years under reviews were below
the industry average of 2 times the current liabilities. In fact, the
current liabilities in some years exceed the current assets.
The efficiency ratios showed that lot of the company’s capital is
tied down as a result of low stock turnover in most of the years in
review. The debtor’s collection period shows an inefficient
management of the company’s debtors, while there was
inconsistency in the management of creditors.
The correlation coefficient calculated shows a positive
relationship between working capital and profitability of the company,
however the relationship was not very strong. It was also found out
from the hypothesis tested using chi-square that Cadbury Nigeria PLC
doesn’t have a good management of working capital.

CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 SUMMARY
This research work studied the effect of working capital
management on the profitability of manufacturing firms, in which

61
Cadbury Nigeria PLC was the case study. The study is broken into
five chapters as follows.
Chapter One covered the general introductory aspect of the
study. The chapter also points out the objectives, scope and
significance of the study. Research question and hypothesis were
also formulated and stated in the chapter. Chapter Two dived into
the work and postulations of scholars who have written tremendously
on issues relating to working capital and profitability.
Chapter Three of this study covers the methodology adopted in
the collection of data which include both the primary and the
secondary data. The techniques to be employed in analyzing the data
collected were also established in the chapter.
Chapter Four of the study is devoted to the presentation and
analysis of data collected with a view to confirm or refute the
research questions. The hypothesis is tested to arrive at valid
conclusion. Various working capital ratios were also computed.
Finally, Chapter Five is devoted to summary, conclusion and
recommendations.

5.2 CONCLUSION
Effective and efficient management of working capital is
essential to the operation of any business entity be it manufacturing
or retail business. It is essential because there is need for a business
to be able to meet its short term obligation and other immediate
need of the business. Working capital can also be used to access the
performance or otherwise of a business in the short run.

62
 The existence of working capital in Cadbury Nigeria PLC from
the ratios computed and questionnaires analyzed we can draw the
conclusion that the company has inadequate and poor quality
working capital. This assertion is based on the fact that the ratios
computed showed the weakness of the company's position and which
shows that the company has been overtrading and over stocking of
goods.
Finally it can be concluded that working capital if managed
properly can contribute to cost reduction and increased profitability of
a company.

5.3 RECOMMENDATIONS
Based on the investigations conducted and the findings of this
study, the following recommendations are put forward by the
researcher, for the management of Cadbury Nigeria PLC to improve
on areas of weaknesses.
Firstly the company adopts physical stock counting. This should
be done annually, quarterly, monthly and weekly basis as the case
may be. This will discourage and help to detect waste and pilferations
of stock within the company. The stock record card figure should
agree with actual quantity.
The company should reduce the period between the time cash
is paid out for raw material and the time cash is recorded from sales
of the company’s product. This will provide funds for regeneration
and increasing working capital of the firm thereafter.
The company should pay more attention to its liquidity position
63
and improve on it. This is because a company that has no favorable
liquidity position may likely face insolvency problems.
In addition, the company should from time to time organize
orientation courses and seminars on working capital management for
its staff. This will help the company to be more aware of the
importance of effective working capital management and to back on
their industrial experience with modern and scientific ideas as they
may be necessary, the poor working capital can also be remedied
through provision of additional fund by the shareholders and loans
from banks.
Finally, Cadbury as international company should carry out
more research to develop new product with the view of diversifying
into new areas or lines of business.

REFERENCES

Aborede, R., (2006). Strategic Financial Management. Shomolu,

Lagos: Master stroke Consulting Ltd.
64
Agbor, M. A., (2000). Fundamentals of Business Statistics. Lagos:
Bendona and Associates Ltd.

Akinsulire, O., (2006). Financial Management. 4th ed. Lagos: Ceemol

Nig. Ltd.

Braid, J. M., (1986). Inventory Management: The Student Accounts.

A Journal of Association of Student Accountants, University of
Science and Technology. Port-Harcourt. Vol. 6, p. 9.

Cadbury Nigeria PLC. (2004-2008).Annual Reports and Accounts.

Chetwynd, A., (2007). Working Capital Management. California:

Santa Monica Publishers.

Elikwu, M., (2008). Research Project Made Easy: A Simplified

Approach to Write & defend A Good Research Report . Lagos: Cin-
Eight Publishers.

Ifeh, G.O., (2002). Working Capital: A tool for cost Reduction and
Improvement in Profitability (A study of Nigeria Breweries PLC.).
Enugu, Nigeria. Online, Assessed 8th September 2010.

Madufor, S., (2006). Understanding Credit and Risk Management.

Lagos: Standard 3ICE publishers.

65
Nwanna, O. I., (2005). Concepts in Financial Management Finance &
Banking. Lagos: Gold trust ventures Ltd.

Olowe, A., (1997). Financial Management: Concepts, Analysis and

Capital Investment. Brierly Jones Ltd.

Osibodu, C.O., (1990). A Typically x-ray of working capital

Management: The Nigerian Accountant. Lagos: Vol. 23(2), p.25

Osisioma, (1990): Working Capital Management: Studies in

Accountancy. Enugu: New Age Publishers. p. 288

Osuala, E. C., (2005). Introduction to Research Methodology in

African. Onitsha: First Publishers Ltd.

Padachi, K., (2006). Trends in Working Capital Management.

International Review of Business. Vol. 2

Pandey, M, I., (2006). Financial Management: 3rd ed. India. Vikies

Publication.

Raheman, A. & Nasr, M., (2007). Working Capital Management And

Profitability (Case Of Pakistani Firms). International Review of
Business Research Papers. Vol. 3(1). pp.279 - 300.

66
[Link] [Link] (2006). Working Capital

[Link] (1999 – 2000). Managing Working Capital

APPENDICES
APPENDIX 1
SAMPLE OF QUESTIONNAIRE
67
 Department of Accounting,
Faculty of management Sciences,
P.M.B. 117,
Gwagwalada, Abuja.
Dear Sir/Madam,
I am a final year student of University of Abuja, Faculty of
management sciences, Department of Accounting, conducting a
research on the topic “the effect of working capital management on
profitability” and your company was chosen as a case study. This is
in partial fulfillment for the required for the award of [Link]. Degree in
Accounting.
I will be grateful if you can assist me in completing the
questionnaire as sincere as possible. Please be assured that
information provided will be treated in strict confidence and will be
used for research purpose only.

Yours sincere,

Olusegun Segun.

THE QUESTIONS
SECTION A: INFORMATION ABOUT THE RESPONDENTS
1. Gender: Male ( ) Female ( )

68
2. Current Level Held:
Executive Staff ( )
Senior Staff ( )
Junior Staff ( )
3. Years of Experience in the company:
Less than one year ( )
Over 1 year but less than 5 years ( )
5 to 15 years ( )
Over 15 years ( )
4. Department or Section:
Finance and Accounts ( )
Marketing Department ( )
Production Department ( )
5. Educational Background?
ONH ( ) HND ( )
B. Sc. ( ) [Link]. ( )
[Link]. ( )
Others, please specify………………….

SECTION B: LEVEL OF WORKING CAPITAL MANAGEMENT

6. The importance of effective and efficient working capital

management has been fully appreciated by your company.

69
 Strongly agree ( ) Agree ( )
Disagree ( ) Strongly disagree ( )
7. Cadbury Nigeria PLC as s manufacturing company maintains an
optimum level of working capital in her daily operations.
Strongly agree ( ) Agree ( )
Disagree ( ) Strongly disagree ( )
8. An optimum level of working capital impacts on the profitability
of the company.
Strongly agree ( ) Agree ( )
Disagree ( ) Strongly disagree ( )
9. Working Capital Management in an effective tool in evaluating
the performance of your company.
Strongly agree ( ) Agree ( )
Disagree ( ) Strongly disagree ( )
10. Cadbury Nigeria PLC prefer short term financing to long term
financing of current assets.
Strongly agree ( ) Agree ( )
Disagree ( ) Strongly disagree ( )

SECTION C: EFFECT OF INEFFICIENT WORKING CAPITAL

MANAGEMENT
11. Cadbury Nigeria PLC encounters difficulties in the efficient and
effective management of its working capital components.
Strongly agree ( ) Agree ( )
Disagree ( ) Strongly disagree ( )

70
12. How will you assess the effectiveness of the company’s working
capital management towards the need for cost reduction and
increase in profit.
Very Good ( ) Good ( )
Poor ( ) Fair ( )
13. Has your company ever experience lack of funds to meet its
immediate obligation.
Yes ( ) No ( )
14. What factor do you think militate against effective management
of working capital components in your company.
i. ……………………………….......................................................
ii. ……………………………….......................................................
iii. ……………………………….......................................................
iv. ……………………………….......................................................
v. ……………………………….......................................................
15. What are the immediate impact of inefficient management of
working capital in your company?
i. ……………………………….......................................................
ii. ……………………………….......................................................
iii. ……………………………….......................................................
iv. ……………………………….......................................................
v. ……………………………….......................................................
APPENDIX 2

TABLE FOR CALCULATING CORRELATION COEFFECIENT

Years X Y XY X2 Y2

71
 N’m N’m N’m N’m N’m
2004 3,891 4,391 17,073,708 15,139,881 19,254,544
2005 3,937 9,508 37,432,996 15,499,969 90,402,064
2006 (1,841) (8,853) 16,298,373 3,389,281 78,375,609
2007 (2,461) (13,101) 32,241,561 6,056,521 171,636,201
2008 (1,320) (14,428) 19,044,960 1,742,400 20,867,184
Total 13,450 50,281 122,091,598 41,828,052 567,835,602
Where: x = Profit Before Interest and Tax: Y = Working Capital

r= ∑xy -∑x(∑y) =0.7005

[n∑x2- (∑x)2] [n∑y2 - (∑y)2]

APPENDIX 3

Calculation of Chi-square for Hypothesis Two

72
Observed Expected
Frequency Frequency O-E (O - E)2 (O – E)2
E
(O) (E)
16 9.25 6.75 45.5625 4.9257
7 9.25 (2.25) 5.0625 0.5473
9 9.25 (0.25) 0.0625 0.0068
5 9.25 (4.25) 18.0625 1.9527
12 14.25 (2.25) 5.0625 0.3553
12 14.25 (2.25) 5.0625 0.3553
17 14.25 2.25 7.5625 0.5307
16 14.25 1.75 3.0625 0.2149
5 8.25 (3.25) 10.5625 1.2803
10 8.25 1.75 3.0625 0.3712
8 8.25 (0.25) 0.0625 0.0078
10 8.25 1.75 3.0625 0.3712
3 4.25 (1.25) 1.5625 0.3674
7 4.25 2.75 7.5625 1.7794
2 4.25 (2.25) 5.0625 1.1913
5 4.25 0.75 0.5625 0.1323
Xc2 = 14.3895

73