THE RELEVANCE OF WORKING CAPITAL MANAGEMENT IN MANUFACTURING INDUSTRIES IN ZIMBABWE. A CASE STUDY OF OLIVINE INDUSTRY (PVT) LTD
BY
NYAKABAMBO TAPIWA
(R164327S)
PROJECT PROPOSAL SUBMITTED PARTIAL FULFILLMENT OF THE REQUIREMENT OF FACULTY COMMERCE
2017
CHAPTER 1
1.1 INTRODUCTION
This project focuses on the relevance of Working Capital Management in the management of production firms in Zimbabwe. The Zimbabwean economy is facing turbulent times especially with the lack of cash in hand, this is a cause of concern to businesses to manage effectively their working capital. In addition, the study will look at the background to the study, the statement of the problem, the research questions and objectives, the hypothesis,
1.1 BACKGROUND THE STUDY
It is necessary to understand the meaning of current assets and current liabilities for learning the meaning of working capital management. Working capital management refers to a company’s managerial accounting strategy designed to monitor and utilize the two components of working capital, current assets and current liabilities, to ensure the most financially efficient operation of the company (Gill, 1994, Hill, 2013, Lamberg, 2009, Ibrahimov, 2014, Oazi, Kaddumi, Ramadan, 2012, Raheman, Nazr, 2012, Rahemanet, 2007, Wegner, 2007). Working Capital is calculated by subtracting current liabilities from current liabilities. Current assets include cash, market securities, inventory, accounts payables and short term assets to be used within a year.
(Fitzgerald 2006) defined current assets as, “cash and other assets which are expected to be converted in to cash in the ordinary course of business within one year or within such longer period as constitutes the normal operating cycle of a business.” Current liabilities include accounts payables and the current portion of a long term debt It is rightly observed that “Current assets have a short life span. These types of assets are engaged in current operation of a business and normally used for short– term operations of the firm during an accounting period, that is, within twelve months. The two important characteristics of such assets are short life span and swift transformation into other form of assets. Liquidity and profitability are two important and major aspects of corporate business life (Vataliya, 2009).
The problem is that increasing profits at the cost of liquidity can bring serious problems to the firm. Therefore, there must be a trade-off between these two objectives (liquidity and profitability) of firms. One objective should not be at the cost of the other because both have their own importance. If firms do not care about profit, they cannot survive for a longer period. In other round, if firms do not care about liquidity, they may face the problem of insolvency or bankruptcy. For these reasons managers of firms should give proper consideration for working capital management as it does ultimately affect the profitability of firms. As a result company can achieve maximum profitability and can maintain adequate liquidity with the help of efficient and effective management of working capital. Management has a dual interest in the analysis of financial performance such that, to assess the efficiency and profitability of operations and to judge how effectively the resources of the business are being used (Erich A. Helfert, D.B.A, 2001).
1.1.1 Background of Olivine Industries (Pvt.) Ltd in Zimbabwe.
Olivine Industries (Pvt.) Ltd manufactures and supplies a wide range of products such as detergents, toiletries, and edible oils and tinned foods, in other words fast moving consumer goods (FMCGs). The company started as a small firm in Nyazura before relocating to Harare. It became Olivine Industries at independence in Zimbabwe and the name has become a household name. In addition the name is also derived from the three precious stones that are depicted on its logo The Financial Gazette 5 July 2012.
1.2 Statement of problem
The subject on working capital management gained prominence with the aftermath of the economic recession of 2008. Whilst the majority of literature was published before the late 1980’s after world markets were recovering from events such as the 1975 oil crises. Early studies on working capital management (WCM) dwelt much on the close relationship between working capital and the company’s liquidity and profitability (Gill, 1994, Hill, 2013, Lamberg, 2009, Ibrahimov, 2014, Oazi, Kaddumi, Ramadan, 2012, Raheman, Nazr, 2012, Rahemanet, 2007, Wegner, 2007). However, less attention has been drawn on the working capital policies and their impact during distressful economic periods as noted in Zimbabwe since 2000. Because production decline this has affected profitability of at Olivine industries as well as future operations of the organization which clearly shows that liquidity is important for the survival of the business. The continuous shortage of cash has further reduced Olivine business operations. Currently, the company is operating below capacity and has failed to meet local demand due to lower production output coupled with a volatile macroeconomic environment. This has led competitors from Southern Africa among them South Africa to penetrate the local market. This clearly shows that liquidity has affected the production capacity of the company. As a result, the study seeks to find out how Olivine Industries can adopt new working capital management strategies to avert a possible collapse due to capital constrains.
1.3 RESEARCH OBJECTIVES
The research objectives of the study are;
? To evaluate other method of debt payments than payment out of cash.
? To evaluate an optimal working capital cycle that will encourage payment of debtor using short term sources of fund.
? To examine the extent to which working capital management is being practiced at Olivine Industries in Zimbabwe.
? To establish the importance of working capital management.
? To find out limitations and shortfalls being faced in the practice of working capital at Olivine Industries in Zimbabwe.
? To determine the relationship between working capital management and corporate performance at Olivine Industries in Zimbabwe.
? To make relevant recommendation based on findings that will enhance the efficient practice of working capital management.
1.4 RESEARCH QUESTIONS.
The research questions of the study are;
? What are the other method of debt payments than payment out of cash that Olivine Industries can adopt to improve liquidity flow?
? Is there an optimal working capital cycle that will encourage payment of debtor using short term sources of fund at Olivine Industries?
? What is the extent to which working capital management is being practiced at Olivine Industries in Zimbabwe?
? What is the importance of working capital management?
? What are the limitations and shortfalls that are being faced in the practice of working capital management at Olivine Industries in Zimbabwe?
? What is the relationship between working capital management and corporate performance at Olivine Industries in Zimbabwe?
? Are there any relevant recommendation based on findings that will enhance the efficient practice of working capital management at Olivine Industries?
1.5 RESEARCH HYPOTHESIS.
A few numbers of research hypothesis can be made in view of the impact of working capital management on firms’ performance. In light of the research objective the following discussion will covers the hypotheses that this study will attempt to test
H0: Inventory management have significant impact on firms` financial performance and working capital management
H1: Inventory management have no significant impact on firms` financial performance and working capital management
1.6 Research participants/subjects
The research participants for the study will include management, employees, distributors, retailers and customers will participate in the study.
1.7 Significance of the study
This study of Working Capital Management is of paramount importance to many stakeholders in the country. In bring up a conceptual framework to researchers, financial managers, accountants professionals and policy makers in the production environment of Zimbabwe. The findings helps to assess the effectiveness of working capital on firms’ performance in the studied companies for program evaluation.
The research also help to develop an understanding of the advantages and disadvantages of financial practices and techniques of managing working capital components in the production industry. The study would suggest various financial management techniques that a production company can use to measure their performance in terms of profitability, for example Current Ratio to assess the firms liquidity status, Activity Ratios, Leverage Ratio, Cash Conversion Cycle (CCC), Return on Investment (ROI) and Return on Equity (ROE).
To the student
The study is in partial fulfillment of the requirements of the Bachelor of Honors in Accountancy Degree at the University of Zimbabwe.
To the University of Zimbabwe
The research may be a valued resource to other members of the institution who may have an interest in the area of working capital management in manufacturing firms. It may also contribute towards a platform for future research.
To Olivine Industries
The findings of this research would help Olivine Industries Zimbabwe by making recommendations for further consideration.
1.8 Delimitations
Geographically the study will be limited to Olivine Industries, one of the largest manufacturing company of fast moving consumer goods (FMCGs) in Harare, Zimbabwe.
1.9 Limitations
The following limitations which the researcher may encounter during the study may include:
Time Constraint
• The research might be limited by the time allowed to gather the relevant information. However, the researcher will have to work during the holiday where possible to gather secondary information on working capital management as well as Olivine Industry.
Sampling Constraint
• The fact that the research shall be conducted using sampling raises a risk of being affected by the weaknesses of the sampling methods used. To reduce the risk a higher rate of sampling will be used.
Confidentiality
• Confidentiality of the profession might result in important information asymmetry as a result conclusions maybe made at surface information. Findings will be for academic purposes only.
Financial Constraints
The research is subject to a tight budget
• Communication via emails will be used to reduce transport costs
• The researcher’s parents will sponsor the printing, telephone and travel expenses.
1.10 Assumptions
• All information acquired in the study is truthful and therefore reliable.
• All individuals approached to avail evidence necessary for the research respond, giving information that is true and unbiased.
CHAPTER 2
LITERATURE REVIEW
2.0 INTRODUCTION
Working capital refers to the cash a business requires for day-to-day operations, or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for revenue. Working Capital Management for financing production firms is not only very important for the production firms, but also important for financial institutions, the government, and all other stakeholders in the production firm business line. While the performance levels of production firms have traditionally been attributed to general management factors such as manufacturing, marketing and operations, working capital management may have a consequent impact on market share and profitability.
2.1 THEORIES OF WORKING CAPITAL MANAGEMENT
The scope and role of financial manager in production firms has been narrowed down to basic approaches as follows:
1. The traditional approach.
2. The managerial approach.
3. The new approach.
2.1.1 The Traditional Approach
According to this approach, the scope of the financial manager are confined to raising of funds (Kehinde and Abiola, 2005), during major events (Such as promotion, recognition, expansion) in the life of the firm. The financial manager has the basic obligation of ensuring that the firm has enough cash to meet its obligations. A notable feature of the traditional approach on financial manager’s duty is the assumption that the financial manager has no concern in the decision of allocating the firm’s funds. The problem of the approach is that much emphasis is placed on long term financing to the detriment of working capital management.
2.1.2 The Managerial Approach
The change in the business situation in the mid-1950, made the traditional approach to outlive its usefulness. The increase in market, the population growth, the management efficiency and future, during and after the mid-1950s necessitated efficient and effective utilization of the firm’s resources. Consequently, financial management approach and scope markedly changed. The emphasis shifted from episodic financing to the managerial financing functions from raising of funds to include efficient and effective use of funds. This approach includes profit planning function. The term profit planning refers to operating decisions in the area of pricing, volume of output and the firm’s selection of productive assets.
2.1.3 New Approach
This approach derive it impetus from the Lord Keynes’s general theory. The core of the new theory, as applied to the business finance is found in the macroeconomic concept that level of aggregate economic investment depends on two factors that is: The additional expected rate of return on investment (marginal efficiency of investment) (Anao, 1990; Charles, 1992). Keynes defined marginal efficiency of capital as ratio between the prospective yields of additional capital goods and their supply price i.e.
E = Y
P
Where E = Marginal efficiency of capital
Y = the estimated yield of the capital asset
P = the supply price of the assets respectively or the original cost of investment.
The marginal efficiency of capital (e) is considered an important determinant of whether an entrepreneur should or should not take interest (r). The entrepreneur will optimize his profit if he continues to take up additional investment until e = r. basically, according to Geoffrey the function of the financial manager is to review and control decisions to commit or recommit funds to new or on-going uses. Thus, in addition to funds, financial manager is directly concerned with production, marketing and other enterprises activities whenever decisions are made about the acquisition or distribution of assets.
2.2 WHAT IS WORKING CAPITAL MANAGEMENT?
The Working Capital meets the short-term financial requirements of a business enterprise. It is a trading capital, not retained in the business in a particular form for longer than year. The money invested in it changes form and substance during the normal course of business operation.
Working capital refers to the cash a business requires for day-to-day operations, or, more specifically for financing the conversion of raw materials into finished goods, which the company sells for revenue. Among the most important items of working capital are levels of inventory, accounts receivables, and accounts payable. The better Olivine manage their working capital, the lesser the need to borrow money. Even companies with cash surpluses need to manage working capital to ensure that those surpluses are invested in ways that will generate suitably high returns for the business.
Implementing an effective working capital management system is an excellent way for many companies to improve their earnings. The difficulty in gaining access to resources and financial markets is due largely to the fact that these companies usually having little or no collateral securities. The few financial institutions, the Microfinance institutions that do give credit to companies charge very high interest to make up for the high risk of granting credit to the companies. This prompt entrepreneurs to look for other avenues to find themselves and such include resorting to borrowing from friends and family, ploughing back profit, using their own savings among others to attain funds which are usually inadequate to find their business operations and activities.
2.2.1 BENEFITS OF WORKING CAPITAL MANAGEMENT
Not to overstate the obvious, but the effective working capital management can free up cash and generate more earnings today. This is particularly important in tight credit markets like we have seen in recent years. A continuous improvement program focused on cash management, accounts receivable performance and inventory management is part of fundamental business management. The path to success is a discipline approach that challenges management to improve the working capital metrics every day.
Working Capital is particularly important for Olivine Industries Zimbabwe. Firms can generate operational capital by minimizing their investment in fixed assets through the renting or leasing plant and equipment but they cannot avoid investment in cash, trade debtors and stock. However, the relationship between the sales growth and the need to finance currents assets is close and direct.
The objective of working capital management is to maintain the optimum balance for each of the working capital component. This includes making sure that funds are held as cash in banks deposits for as long ads and in the largest amounts possible, thereby maximizing the interest earned. However, such cash may more appropriately be invested in other assets or reducing other liabilities.
Each component of working capita that is inventory, receivables and payables has two dimensions TIME and MONEY (THOMAS and SEARBEROUGH). If it comes to managing working capital, Times is money. If you can get money to move faster around the cycle (e.g. collect monies due to debtor more quickly or credit sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you will have additional free money available to support additional sales growth or investment. Moyer et al (2001) submit that effective cash management is particularly important for Mega Pak for the following reasons
• To prepare financial plans to support application for bank loans
• Because of limited access to capital, a cash shortage problem is both difficult and more costly for a small firm to rectify than for a large firm,
• Many entrepreneurial firms are growing rapidly, they have the tendency to run out of cash. Growing sales require increases in inventories and accounts receivable thereby using up cash resources; and
• Entrepreneurial firms frequently operate with only a minimum of cash resources because of high cost of and limited access to capital.
CHAPTER 3
Research Methodology
3.0 Introduction
This chapter will describe the methods that the researcher used to collect, and analyse the data; dominated by desk research for electronic books, publications, reports, working papers, electronic newspapers, journals on working capital management literature in particular.
3.1 Research Design
Polit and Hungler (1999) describe the research design as a blueprint, or routine, for conducting the study in such a way that maximum control will be exercised over factors that could interfere with the validity of the research result. The research design is the researcher`s overall plan for obtaining answers to the research questions guiding the study. Burns and Grove (2001) state that designing a study helps researchers to plan and implement the study in a way that will help them obtain the intended results, thus increasing the chances of obtaining information that could be associated with the real situation.
3.2 Data collection
As already stated in our chapter introduction, the main sources of data were from both primary and secondary sources. When collecting data “each measure needs to be weighed up and considered in the light of your own research goal, as well as the researchers method`s inherent advantages and disadvantages” (O`Leary, 2004).
3.2.1 Primary Data
Data from this is basically from internal members of the business which comprises the owners of small scales and medium scale enterprises, supervisory staff and management personnel. Data collection instrument used were questionnaire, discussion and interviews.
3.2.2 Secondary Data
Data from sources like Business Bulletins, publications, journals, articles from the internet and newspapers.
3.3 Sampling Method
According to O`Leary (2004), sampling is the process that is always strategic and sometimes mathematical, which will involve using the most practical procedures possible for gathering a sample that best represents a larger population. Kumar (2005) motivates that purposive sampling is extremely useful when constructing a historical reality, describing a phenomenon or developing something about which only a little is known. The technique that will be adopted was non-probability sampling. Non-probability sampling is a sampling technique in which unit of the sample are selected on the basis of personal judgement or convenience; the probability of any member of the population being chosen is unknown.
3.3.1 Convenience Sampling
Convenience sampling “is the selecting of participants because it is convenient to access and recruit them, with no attempt to represent the general population r to gather up specific, purpose sample” (Chrisler and McCreay, 2010). The main advantage of convenience sampling is that it is typically quicker and easier to recruit and it does not necessitate exhaustive work from a resource viewpoint. In this case the study is convenient to the researcher since the researcher resides in Harare.
3.4 Research Instruments.
The data collection process was designed to collect data on working capital management of Olivine Industries in Zimbabwe. The instrument used to collect data were questionnaires, discussions and interviews. The respondents were interviewed based on a questionnaire to solicit data on the working capital management of the business. Both open and closed ended questionnaires items were used. This type of instrument is purposely for those who can read and write. For those who cannot read and write, discussions and interviews were employed. The researcher finds no problem having to explain the technical nature of some of the questions to those owners with financial background. However, the researcher had to explain the questions in the local dialect to those owner with no educational background. A dichotomous response items were also adopted to enable the use of Yes or No answers which is easy to adopt.
3.4.1 In-depth interviews
It is a type of research that involves a face to face discussion with respondents at one location and many may be knowledgeable about the phenomena or subject under study. The researcher will use an interview guide in the process of the interview. Equal chances will be given to respondents which will comprise of men and women in the accounting and auditing profession.
3.4.2 Advantages of in-depth interview
In-depth interviews can be used to compliment questionnaires. They provide a room for the collection of supplementary information and may gunner a high response rate if an only if all the respondents can be reached and interviewed with the expert control of the participants so that others do not dominate the issues under discussion. In the same light, the in-depth interview have the advantage that some respondents can aid the discussions through non-verbal communication expressions which the researcher can easily capture especially where recording equipment is permitted to be used.
3.4.3 Disadvantages of in-depth interview
Respondents may not provide what the researcher is seeking where topics are culturally or politically sensitive. The creation of convenient meeting places outside official offices may force some respondents to refuse to participate. On the other hand where the researcher would have made pre-contact arrangements some respondents may not honor them especially those from the armed forces.
3.5 Questionnaires
A questionnaire can either be open ended or closed and are used to solicit the opinions or views of respondents over an issue. They can either be hand delivered or can be through the post. Questionnaires can be effective, because respondents usually complete them at their own spare time. Care should be taken when using questionnaires especially in designing. Long questionnaires usually receive a low return from respondents and too short a questionnaire may leave critical information that might be needed for study. The language used should be as simple as possible so that respondents will be comfortable in answering some of the questions. Posted questionnaires have a disadvantage of the absence of the voice and non-verbal cues found in depth interviews.
3.5.1 Advantages of a Questionnaire
In the study questionnaires will be used due to the fact that the samples are widely spread hence it would reach the study elements quickly and at least cost. The questionnaire guarantees confidentiality, that is, the name of a respondent does not appear on the questionnaire and this ensures anonymity and confidentiality.
3.5.2 Disadvantages of a Questionnaire
One of the weaknesses of a questionnaire is that of misinterpretation of questions by respondents. The researcher will ensure that questions are simple to understand. This also ensures that all subjects have the same frame of reference in responding. The researcher will supplement the questionnaire with the interview; hence vagueness or ambiguities in the questionnaire will be addressed during the interviews.
3.6 Data analysis
The researcher will use the Statistical Package for the Social Science (SPSS) software to produce bar graphs as well as pie charts. SPSS is suitable for basic statistical analysis. It is used to convert raw data into simple visual impressions which is processed into useful information. For the open ended questionnaires the research will group the research findings in
3.6.1 Ethics
Firstly the researcher declares that this paper is her original work and is not related whatsoever to her work environment and at the same time it has not been done before by any individuals, institution or university. Secondly the researcher will not misrepresent herself during field work as well as during the collection of secondary data. Thirdly the researcher will not induce the respondent to give her information and where ethical challenges may be encountered in the field the researcher shall inform her supervisor in advanced. The researcher shall not collect data using concealable equipment
3.7Definitions of terms
Liquidity
According Lamberg & Valming (2009), it is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price. In this study, it is the measure of the extent to which a person or organization has cash to meet immediate and short-term obligations.
Profitability
A profit is what is left of the revenue a business generates after it pays all expenses directly related to the generation of the revenue, such as producing a product, and other expenses related to the conduct of the business activities.
Working Capital
An organization’s working capital refers to its current assets less its current liabilities. Typical assets and liabilities included in these categories are current assets and current reliabilities.
Working Capital Management
Working capital refers to the cash a business requires for day-to-day operations, or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for revenue.
The Working Capital/Cash Operating Cycle
The working capital/cash operating cycle measures the time in days that cash is tied up in working capital and hence, the shorter the cycle the better.
Summary
The chapter looked at the impact of working capital management and the possible strategies that companies can adopt to increase company profitability and liquidity at Olivine Industries in Harare Zimbabwe. In addition, the chapter also looked at the background to the study, the statement of the problem, the research questions as well as objectives. Furthermore, the significance of the study was also tackled but however the chapter ended with a detailed discussion on some of the key definitional terms that are commonly used in working capital management (WCM).
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