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WORKING capital management AT GHANA HOUSEHOLD UTILITY MANUFACTURING COMPANY LIMITED, TAKORADI
TABLE OF CONTENT
Declaration I
Certification II
Dedication III
Acknowledgement IV
CHAPTER ONE
Introduction
1.1Background of the Study 1
1.2 Research Problem 2
1.3 Aims of the Study 3
1.4 Significance of the Study 3
1.5 Research Question 4
1.6 Scope and Limitation of the Study 5
1.7 Literature Review 5
1.8 Methodology 6
1.9 Chapter Disposition 6
CHAPTER TWO
LITERATURE REVIEW
2.1 The Meaning of Working Capital Management 7
2.2 Goal of Working Capital Management 9
2.3 Importance of Working Capital Management 10
2.4 Working Capital Policy 11
2.5 Inventory Management 13
2.6 The Working Capital Cash Flow Cycle 15
2.7 Short-Term Securities Management 17
2.8 Management of Cash and Current Liabilities 18
CHAPTER THREE
METHODOLOGY
The Business plan on Working Capital Management
... the theoretical knowledge that we have about working capital management. The last chapter is Conclusion & Recommendations. This chapter contains the critical evaluation of the ... focus. After analyzing the financial statements and having a deep study of working capital cycle of the company I came to the conclusion ...
3.0 Introduction 21
3.1 Research Framework 21
3.2 Population and Sample 22
3.3 Sampling Procedure 22
3.4 Data Collection Methods 23
3.5 Instruments Used to Collect Data 23
3.6 Methods of Data Analysis 24
3.7 Problems of Data Collection 24
CHAPTER FOUR
ANALYSIS AND PRESENTATION OF FINDINGS
4.0 Introduction 25
4.1 Management of Inventory 26
4.2 Liquidity Management: Cash and Short-term Securities 27
4.3 Management of Accounts Receivable 28
4.4 Management of Current Liabilities 29
4.5 Working Capital Management 29
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary 31
5.2 Conclusion 33
5.3 Recommendation 34
CHAPTER ONE
Introduction
1.1 BACKGROUND OF THE STUDY
Business organizations worldwide undertake investments that will facilitate the achievement of their corporate objectives which includes sales revenue, return on investment, growth, market share, cash flow, corporate image and reputation, shareholder value among others. However the pursuit of these objectives varies depending on the kind of business and its environments. Typically, these investments are in land and buildings, plant, machinery, stocks of various types and cash.
Every student Programmed is expected to undertake a research work. This research work is in partial fulfilment of the requirements for the award of the Higher National Diploma.
The researcher has chosen the topic ‘’WORKING CAPITAL MANAGEMENT AT GHANA HOUSEHOLD UTILITY MANUFACTURING COMPANY LIMITED IN TAKORADI.
Working capital management refers to all aspects of the administration of both current assets and current liabilities. It has to do with establishing and monitoring the appropriate levels of each working capital item to enhance the firm’s profitability. In the context of this study, working capital management refers to the entire process of decisions relating to planning and controlling the level and mix of the firm’s current assets as well as financing these assets. It simply concerns the decisions about a firm’s current assets, usually comprising inventories (stocks), cash and accounts receivables and current liabilities, comprising creditors falling due within one year, and may include amount owed to trade creditors, short-term loans, portion of long-term debt maturing within one year, taxation payable etc.
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More questions are being raised about why working capital management? The study aims at an empirical text of relevance and applicability of financing management models with special reference to working capital management.
The primary goal of working capital management is to maintain optimal level of net working capital that maximizes shareholders wealth.
This research study was centered on effective and efficient role working capital management plays in Ghana Household Utility Manufacturing Company Limited (GHUMCO) Takoradi.
1.2. RESEARCH PROBLEM
In a developing country like Ghana, the financial manager may encounter constraints in financial management decisions and practices. Even more demanding and challenging is the rapid change in financial theories and practices, and the significant advances made by academic researchers in the field of finance. Low production in many firms indicates that there has been a poor working capital management which has led to the loss of many business capitals. The question then is, are there any effective working capital management policies in the company which ensure efficiency of working capital?
It is due to this reason that the researcher undertook to investigate into how the working capital of Ghana Household Utility Manufacturing Company Limited in Takoradi is managed.
1.3. AIMS OF THE STUDY
The aims of the study are as follows;
1. To asses the effectiveness and efficiency of the financial manager in managing working capital.
2. To asses how working capital policies affect the Ghana Household Utility Manufacturing Company Limited’s long-term growth and survival.
3. To ascertain the procedures being used in managing the current assets and current liabilities in Ghana Household Utility Manufacturing Company Limited Takoradi.
4. To ascertain the problems that are encountered in managing working capital in GHUMCO
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5. To make factual and interpretative presentation on how working capital is managed in Ghana Household Utility Manufacturing Company Limited Takoradi.
1.4. SIGNIFICANCE OF THE STUDY
It is hoped that, the recommendations of the study would ensure a more effective working capital management at Ghana Household Utility Manufacturing Company Li
mited Takoradi. It is also hoped that the result will benefit both the organization and the general public in the following ways:
1. The attention of the management will be drawn to the need to maintain effective and efficient working capital management system.
2. The report would also enable the researcher to broaden his knowledge about working capital management.
3. The report will serve as a source of reference for a further research.
4. The study would serve as a guide-post for further research work into the chosen topic.
1.5. RESEARCH QUESTION
The following are the questions the study would attempt to answer;
1. Why working capital is important?
2. Are there any effective working capital management in the company?
3. What are the procedures used in managing the current assets and current liabilities?
4. How effective and sustainable is the system of internal control?
5. Are there any short-term securities management?
6. How management of cash and marketable securities are used in the company?
7. How funds are managed in the company?
1.6. SCOPE AND LIMITATION OF THE STUDY
The study covers the working capital management of GHUMCO. The research work was primarily based on the information provided by the GHUMCO.Thus; it was constrained by the limited information obtained.
Financial resource was one of the basic problems faced during the research. Wider areas could have been covered to gather more information but for financial constraint. Cost of transportation, telephone calls and printing was a problem.
Due to confidential nature of certain information, the management and staff of GHUMCO were not readily prepared to give out the needed information.
Time was another constraint. Combining academic work with the collection and compilation of data was not easy.
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1.7. LITERATURE REVIEW
The researcher gathered information on the topic through the use of internet, Newspapers, Television, radio and textbooks which are related to the topic.
The financial manager at GHUMCO was also consulted for information and guide through this research work.
1.8. METHODOLOGY
Information were extracted from primary and secondary source. Primary source used were information from textbooks and internet, to mention but a few. Secondary source used include questionnaires, observation and interviews.
1.9. CHAPTER DISPOSITION
To provide a systematic flow of ideas; the study has been divided into five chapters.
Chapter one covered the introduction of the study .It looked at the background of the study ,research problem, aim of the study, significance of the study, research question, scope and limitation of the study, literature review, methodology and chapter disposition.
Chapter two considered literature review, analytical and conceptual framework.
Chapter three covers the methodology. It is about how the study was designed, measures taken to obtain valid, liable and adequate information.
Chapter four contains the analysis and presentation of the data gathered.
Chapter five contains the summary, conclusions and recommendations.
CHAPTER TWO
LITERATURE REVIEW
2.1 THE MEANING OF WORKING CAPITAL MANAGEMENT
Authors have expressed divergent views on working capital management, depending upon the adopted perspectives.
Stanley B. Block and Geoffrey A Hirt, in Foundations of Financial Management (1997), pages 139 and 161 noted that working capital management means the financing and management of the current assets of the firm. A firm’s ability to properly manage current assets and associated liabilities obligations may determine how well it is able to survive in the short run. To the extent that part of the built-up in current assets is permanent, financial arrangement should carry longer maturities.
Lawrence D. Schall and Charles W Haley in Introduction to Financial Management (1991), page 739 explain the meaning of working capital management as the management of current asset and current liabilities of the firm which must be considered as a total package because of the many links between current assets and current liabilities.
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www.wikipedia.org/wiki/Working_capital noted, Working capital (also known as net working capital) is a financial metric which represents the amount of day-by-day operating liquidity available to a business. Along with assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. A company can be endowed with assets and profitability, but short of liquidity, if these assets cannot readily be converted into cash.
Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm’s short-term assets and its short-term liabilities. The goal of Working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.
www.studyfinace.com explains that 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 management of working capital involves managing inventories, accounts receivable and payable, and cash.
Working capital therefore is the current asset investment of the firm and Net working capital is the difference between the firm’s current assets and current liabilities.
Association of Certified Chartered Accountants (ACCA), Managerial Finance (study text 2005) noted that working capital management involves a balance between the requirements to minimize the risk of insolvency and the requirements to the return on assets. In effect it is ensuring that sufficient liquid resources are maintained.
It further noted that excessive conservative approach to working capital management resulting in high level of cash holding will harm profits because the opportunity to make a return on the assets tied up as cash will have been missed.
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It is evidently clear from the views of the writers discussed above that working capital management should be considered as an integral part of the overall financial management and should be evaluated in terms of its impact on the valuation of the firm as a whole as well as on its overall need for fund.
2.2 GOAL OF WORKING CAPITAL MANAGEMENT
Ross, Westerfield and Jordan in Essentials of corporate finance (2004), page 22 explained that working capital is the firm’s total investment in current assets and emphasized that these assets are likely to be converted into cash, exchanged or expensed in the normal course of business, usually within a year.
They defined Net working capital as the difference between the firm’s current assets and current liabilities.
They stated that the primary goal of working capital management is to maintain optimal level of net working capital that maximizes shareholders’ wealth.
2.3 IMPORTANCE OF WORKING CAPITAL MANAGEMENT
J. Fred Weston and Eugene F. Brigham (1990) page 402 in their book entitled the essentials of managerial finance, ninth edition and J F Weston and T E Copeland (1989) page 239 chapters 11, highlighted the relevance of working capital management as follows:
1. The largest portion of most financial managers’ time is devoted to the day-to-day internal operations of the firm, which falls under the heading of working capital management.
2. Current assets represent a large proportion of total asset; generally about forty percent. Moreover, current assets fluctuate with sales and sales vary over time. Thus managing current assets is a dynamic process and it requires the financial manager to closely monitor sales, indeed to anticipate changing levels of sales to ensure that assets in hand are in sufficient quantities to meet sales and production targets.
3. Working capital management is particularly important to small firms. Although small firms can minimize their investment by renting or leasing plants and equipment, they cannot avoid investment in cash, receivables and inventories. Furthermore, because small firms have relatively by limited access to the long-term capital markets, they must rely heavily on trade credit and short-term bank loans, both of which affect working capital by increasing current liabilities.
4. The relation between sales growth and the need to invest in current asset is close and direct. As sales grow, the firm must increase receivables and inventories and it may need to increase its cash balance as well. A sales increase would also produce an immediate need for inventions and perhaps, for more cash. All such needs must be financed. Any increase in an account on the left hand side of the balance sheet must be matched by an increase on the right hand side. Therefore, it is imperative that the financial manager becomes aware of sales trend and their effects on the firm’s working capital.
2.4 WORKING CAPITAL POLICY
It’s the basic policy decisions regarding target levels for each category of current asset and regarding how current asset will be financed.
Two policy issues have been identified by the financial literature as being relevant to working capital management.
J F Weston and T E Copeland in Managerial Finance (1989), page 246, noted that the first policy question deals with the determination of the level of total current assets that should be held by the firm. The option available under this policy boarder on aggressive, conservative or average management of a firm’s working capital.
The second policy decision confronting management concerns the relationship, types of assets, and the way these assets are financed. One policy calls for matching assets and liability maturity by financing current assets with short-term debt with long term debt or equity. Considering the constraints posed by the permanent investment portion of the current asset.
J F Weston and T E Copeland Managerial Finance page 246 consider this matching principle unsound and in its place suggested financing the permanent portion of the current assets with the permanent portion of short-term debt (the spontaneous portion provided by the accounts payable and accruals) and by long-term debt and equity financing to the extent required. ‘Permanent’ current assets refer to the base level of current assets that does not change from season to season.
Based on the assumption that business would never hold short term marketable security while concurrently incurring short-term debt; It has been suggested that if net asset requirements exceed long term source of finance, then short-term bank borrowing is needed.
2.5 INVENTORY MANAGEMENT
Investment in inventory is essential for the smooth functioning of the business.
Working capital priorities and target goals can change quickly and the roles of inventory must be evaluated in context of developing corporate strategy.
J F Weston and Eugene F Brigham in Essentials of Managerial Finance (1990), page 508 again described inventory management as determining how much inventory to hold, when to place orders, and how many units to order at a time.
J F Weston and Eugene F Brigham in Essentials of Managerial Finance (1990), page 490 grouped inventories (stock) into three classes:
1. Raw materials
2. Work-in-progress
3. Finished-goods (or merchandise for a retailer).
They used the following terms below to explain inventory management
a. Inventory cost
The goal of inventory management is to provide the inventory requirement to sustain operation at minimum cost.
The first step is to identify all the costs involved in purchasing and maintaining inventories.
b. Orderly costs
The cost of placing and receiving an order; this cost is fixed, regardless of the average size of inventories. A proper system of control and of stock must be instituted before any decision rules can be applied to the management of stocks.
c. Carrying cost
The carrying cost is the cost associated with carrying inventories. They include capital, storage and depreciation costs.
d. Optimal Ordering quantity
Economic order quantity (EOQ) is the commonly used approach used to determine optimal inventory level.
Economic ordering quantity states that the optimal or least cost quantity of inventory should be ordered.
An inadequate stock control system will result in much investment in stock or stock outage, thus the primary requirement is that stock levels should be optimal, for example if stocks are too high;
i. There is a risk of deterioration due to the length of time inventories are kept in storage.
ii. Cost of storage e.g. warehousing and insurance have to be met.
iii. Excess capital is tied up unproductively.
If stocks are too low;
i. Any economies resulting from bulk buying are lost.
ii. There is a risk of interruption to producing due to shortage.
iii. Frequent ordering with associated cost will be necessary
A proper system of controls and record of stocks must be instituted before any decisions can be applied to the management of stocks. In order to ensure the desired profit level of the company is met, the stock control system deserves the attention of the financial manager.
In practical terms, a typical ratio which can be examined to help assess a company’s inventory policy is the inventory turn over ratio.
Inventory Turnover = cost of goods sold / average inventory
It measures the number of times a firm sells its inventory in a year.
The proper amount of safety stock could be determined by balancing the probability and cost of stock out against the cost of carrying enough stock.
2.6 THE WORKING CAPITAL CASHFLOW CYCLE
Many authors have different views on the ways in which material and labour can be converted into cash.
According to J F Weston and Eugene F Brigham in Essentials of Managerial Finance (1990), page 405, working capital cash flow cycle involves the following:
i. Inventory conversion period
This is the length of time required to convert raw materials into finished goods and then to sell these goods. They noted that the inventory conversion period can be calculated as 360 days divided by the inventory turnover ratio (sales/inventory).
Thus, Inventory Conversion Period = 360/ Sales/ Inventory
ii. Receivables Conversion Period
This is defined as the length of time required to convert the firm’s receivables into cash that is to collect cash following a sale. They also refer to receivables conversion as the day’s sales outstanding.
iii. Payable Deferred Period
This is defined as the average length of time between the purchase of raw materials and labour and the payment of cash for them.
iv. Cash Conversion Cycle
It is the average length of time between paying for raw materials purchased and receiving cash from the sale of finished goods.
The cash conversion period can be calculated as follows:
Inventory Conversion Period + Receivable Conversion Period + Payable Deferral Period = Cash Conversion Cycle
2.7 SHORT-TERM SECURITIES MANAGEMENT
The company’s cash management as part of it optimal balance is to be established, and once the firm has determined that optimal cash balance, the residual of its liquid asset is invested in short-term securities.
Market for short-term securities is called the money market. Short-term securities are considered ‘near cash’ assets since they can easily be converted into cash at short notice at lower cost with a bit of little risk of loss. There are two primary reasons why marketable securities may be held. These are
a. Substitute for cash;
Most companies hold portfolio of marketable securities to avoid keeping large cash balance, liquidating part to increase cash when outflows exceed inflows.
b. Temporary investment;
Temporary investment in marketable securities generally occur in when the firm must finance seasonal or cyclical operations and when the firm must meet some loan financial requirement
Many companies and firms invest in the following money market instruments which by definition are highly marketable and subject to title default risk:
i. Commercial paper
ii. Bankers acceptance
iii. Negotiable certificate of deposits
iv. Treasury bills
2.8 MANAGEMENT OF CASH AND CURRENT LIABILTIES
The task facing managers, especially the financial managers in working capital decision is towards the dual goal of liquidity and profitability of the firm.
Profitability has to do with ensuring that the management is planning and controlling cash flows to increase a company’s profitability’s and maintain its liquidity.
Cash management function is the management of marketable securities, the portfolio of highly liquid near-cash assets which serve as a backup to the cash account.
In cash management, one important dimension is the investment of excess cash or the borrowing of short-term to cover a cash flow short fall.
Writers have theorized in support of John Maynard Keynes’ position that the motives for holding cash are namely transaction motives, precautionary motive and speculative motive.
Writers like Van Horne in Financial Management and Policy (1995) page 388, and Ross, Westerfield and Jordan in Essentials of Corporate Finance (2004) 4th edition, page 503, support John Maynard Keynes (1936) about his motive for holding cash.
According to John Maynard Keynes, the transaction motive is the need for cash to meet payments arising in the ordinary course of the business. The precautionary motive has to do with maintaining a cushion or buffer to meet expected contingencies. The speculative motive relates to holding cash in order to take advantage of expected changes in security price.
Ross, Westerfield and Jordan in Essentials of Corporate Finance (2004), page 503 explain this motive of holding cash in connection with John Maynard Keynes.
According to him, speculative motive is the need to hold cash to take advantage of additional investment opportunities such as bargain purchases. Precautionary motive is the need to hold cash as a safety margin to act as a financial reserve. Transaction motive is the need to hold cash to satisfy normal disbursement and collection activities associated with a firm’s ongoing operations.
Literature emphasizes the prominence accounts payable or trade credit in financing short-term liabilities of the business.
J F Weston and T E Copeland in Managerial Finance (1989), page 321 again make reference to trade credit as ‘‘the largest single category of short-term credit, representing about one-third of the current liabilities of non-financial corporations.’’
The credit-taken firm derives much in efficiently managing its payables.
CHAPTER THREE
METHODOLOGY
3.0 INTRODUCTION
This chapter describes how the research was conducted, the methods employed in conducting the research, information needed to undertake the study and how the problem was investigated. It also deals with how the researcher gathered and analyzed the data collected.
The chapter contains the research framework, population and sample, sampling procedure, data collection methods, and instruments used to collect data, methods of data analysis and problem of data collection.
3.1 RESEARCH FRAMEWORK
This study is a case study type which enables an aspect of a problem to be studied in details within a limited time scale.
The researcher identified a problem with the management of working capital in Ghana Household Utilities Manufacturing Company Limited in Takoradi.
The collection of data was made by using interview and questionnaires, the data was analysed and arrived at conclusion and made recommendations.
3.2 POPULATION AND SAMPLE
The study was conducted at GHUMCO, Takoradi where much attention was placed with a sample of about ten workers in the accounts office, including the accountant, personnel manager and the finance office staff.
However due to certain constraints such as money, time and other necessary resources, only a sample of the study was made for the research work.
The selected population were interviewed and given questionnaires to respond to.
3.3 SAMPLING PROCEDURE
The researcher used random sampling and purposive sampling in obtaining information from the selected population.
The accountant and the personnel manager interviewed were included in the sampling, whilst the finance office staff were chosen randomly due to their involvement in the management of working capital.
The researcher interviewed the accountant and the personnel manger to give more information by the use of questionnaires because the researcher believes they had the experience in their field.
3.4 DATA COLLECTION METHODS
The researcher made use of both primary and secondary sources.
Primary sources were collected using interviews supported by questionnaires. Interview was conducted with the accountant and the personnel manager who limited the information needed. After the questionnaires had been administered, statistical tables were used in analyzing the primary data collected from them.
Information from secondary source were derived from the annual reports and audited accounts, and balance sheet, cash budgets and inventory tally cards.
Apart from the information obtained from the sources, the writer also relied in depth on textbooks available in Takoradi Polytechnic library and other libraries.
3.5 INSTRUMENTS USED TO COLLECT DATA
The researcher used interviews and questionnaires as the main tools to collect data for the study.
In designing the interview guide, care was exercised to ensure the interviews were simple and brief.
The questionnaires contained both open and closed questions. This approach gives room for different views and answers.
Questionnaires and interviews were used because it is a cheap and easy way of acquiring information.
Personal interviews were used for more elaboration on issues concerning ratios and graphs to obtain prompt feedback.
3.6 METHODS OF DATA ANALYSIS
The data received from respondents were grouped into different categories according to the kind of answers given in response to the interview and questionnaire.
The researcher used the descriptive statistics in analyzing the data collected.
3.7 PROBLEMS OF DATA COLLECTION
Some problems encountered in the course of the research include financial constraint that is the high cost of transportation in looking for materials, information and distributing the questionnaire to the respondents.
CHAPTER FOUR
ANALYSIS AND PRESENTATION OF FINDINGS
4.0 INTRODUCTION
The main purpose of the study was to identify how the working capital is managed at Ghana Household Utilities Manufacturing Company Limited (GHUMCO) at Takoradi.
This chapter contains analysis of data collected from the questionnaire distributed and the interview conducted at GHUMCO.
The company was established in 1960 as one-man company limited by Mr. Ko, a Chinese, for the manufacture of enamel wear (pans).
In the early 1970, Mr, Ko, sold part of the company shares to the public, but still owned the majority shares.
The research findings and their implications are covered in this chapter; an account of the management policies and practices of its current asset and current liabilities incorporated in the research.
This study was carried to verify whether there were effective and efficient working capital management in GHUMCO Takoradi.
4.1 MANAGEMENT OF INVENTORY
The firm has one type of inventory that is raw materials. Raw material purchase orders are normally placed and paid for prior to supply of goods.
To determine the firm’s raw material stock, the general policy is to rely on the following for monthly production;
I. Confirmed order yet to be executed;
II. Estimated special order;
III. The trend of past orders for 3 – 6 months period.
IV. Sales forecast for the year.
The firm has computerised its costing analysis from which projections and actual for ordering, carrying productions and other operational cost, among others, is easily derived.
The firm’s sources of raw material suppliers (foreign) have peculiar problems. Foreign raw materials orders are subject to six (6) months pre-booking with monthly shipping schedule. Once booked, it becomes a firm order for which no cancellation or rescheduling is permissible, payment arrangements by the banker’s draft. The company however imports all its raw materials from china and Honking. Situations of order inflexibility are sometimes identified with this source. With this inflexible pre-booking arrangements already in place, stock of raw materials inventory just kept increasing month after month.
Inventories form a link between production and sale of a product. Raw materials inventory gives the firm flexibility in its purchasing. Without it, the company must exist on a hand-to-month basis, buying raw materials in keeping with its production schedule.
4.2 LIQUIDITY MANAGEMENT: CASH AND SHORT TERM SECURITIES
It was observed that the firm has elaborate system of planning and control for its cash management. The policy includes investment in short-term securities when cash inflow exceeds disbursement, the unutilised portion are deposited in it account at Ecobank and Ghana Commercial Bank. It was observed that the firm’s renovation and repairs programme which covers the period of study put strong pressure on cash outflow. Foreign loans for the project are subject to quarterly payment of interest and amortised payment of principal.
The firm’s computerisation programme has contributed to a detailed and flexible cash budget. It has a quarterly and yearly cash budget which are monitored, controlled and reviewed monthly by the accountant. Monthly report on inflow, outflows and financing ensures continuous revision, overcast and decisions.
Underlining these reviews is the uncertainties of forecast being met. Overdraft facilities have been negotiated in place with the firm’s bankers to forestall the probability of cash insolvency. This margin of safety has been utilized extensively to keep a float by the company. The rapid depreciation of the cedi and the high interest rate on bank loan has necessitated and negotiated upward to the overdraft facilities.
The firm has no minimum cash facilities being made redundant by the well resourced and annually reviewed overdraft facilities from the banks. In most cases, overdraft facilities are used to the limit and sometimes even temporary exceeded. The accounts are however, required to be paid off at least twice every quarter. This periodic paid off provision assures the bankers that the company is not using short-term loans for long-term purposes.
The firm’s cash inflows experienced much delay, given the firm’s 25% cash sales for all its products and its basic requirements for advance payment. Banker’s drafts are used more often in settling credit sales.
Official receipts are signed and issued by an authorised person, for all monies received, cash or otherwise stating the amount received, the name of the payee and the purpose of the payment received. All monies received are banked the same day or kept in a safe custody under lock to be deposited the next day if not received earlier in the day.
4.3 MANAGEMENT OF ACCOUNTS RECEIVABLE
The sales of the company product are categorised into cash, 80% and credit, 20%. Cash sales consist of either 100% upfront or 80% advance, subject to payment of balance on delivery of goods; and all customers are expected to pay cash except the few approved agent who pay by banker draft.
4.4 MANAGEMENT OF CURRENT LIABILITIES
Management of current liabilities is the decisions about the company short-term owing or how current liabilities of the firm are financed.
Management of current liabilities by the company helps them settle debts which fall due within a year in order to preserve credit worthiness.
The company uses short-term loans for short-term needs such as paying part-time workers. The company has no problem with bank credit. No formal credit application is required although the company always assess the credit worthiness of a new customer. The cost of trade credit to the purchaser always depends on the payment made and discount given or allowed. Banks lend money to the firm under different financial management which could be straight forward.
4.5 WORKING CAPITAL MANAGEMENT
Analysis of the working capital management of GHUMCO reviewed a total deviation from theory in many respects.
The firm for example has never granted cash discounts to its customers, a situation which calls for a review in the face of the current high interest rates.
It was observed that, the firm is suffering seriously from liberalisation. That is competitors from countries like china and Cuba are allowed to compete with the company in selling their product at a lower price and other inferior products from other countries competing with the company.
The firm’s inventory management has some short-comings. It has had experiences of stock-outs and over-stocking at certain points in time. All these have a direct impact of the firm’s overall valuation and profitability.
Stock-outs tend to derive customers away to competitors and I had the impression that their effects on the company have not been properly assessed.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 SUMMARY
One objective of this study was to investigate the effectiveness of working capital management in Ghana Household Utility Manufacturing Company Limited (GHUMCO), Takoradi. Towards this, data was collected, factual account given and interpretation offered. Another objective of the study as a test case was to ascertain the problems that are encountered in managing working capital.
Some literature on working capital was received though extensive and numerous issues were discussed and a number of theoretical expositions provided by various writers were outlined.
The firm’s working capital management methods for the various component items were discussed. Coming out of the findings were the fact that the firm sets no minimum cash level, undertakes no investment in marketable or short-term securities but rather uses it computerised operations to monitor, control and revise it cash budget monthly.
Cash and credit sales are made up of 80% and 20% respectively. Credit sales are settled by bankers draft and immediate collection procedures are followed to address the account.
Management relies solely on experienced and best judgment to mange the firm’s inventory, relying extensively on computerised monthly stock assessment of confirmed order, production schedule, and supply schedule of raw materials. No specifically determined safely stock is maintained and other unites or quantitative are flexible.
The theoretical possibility of a better and more efficient management of the firm’s working capital was justified. The total application of theory and models by the firm in the context of operation constraints and short comings was analysed and not feasible. This situation notwithstanding, complete reliance on experienced and intuition by the firm to most working capital decisions was considered as not the best. It is suggested that the advantages of the theoretical models and the operation experience could be joined to isolate the best or both.
Arising from the study was the observation that no attempt were made (and in the case of GHUMCO) to determine the efficiency and effectiveness of current practices as against theoretical principles and models, an exercise which in itself, will provide in allowable education value and offer justification either method.
The study also revealed the importance of managing short-term assets as a team exercise whose success is a direct function of the input from the various unit of the firm’s coordination by the financial manager. However, in most cases, strict application of the theoretical principles does not provide practical solutions in financial management problems despite the vitality of the principle involved.
5.2 CONCLUSION
In the study, a number of activities and event were observed which led to the following conclusions:
a. The various techniques and methods used by GHUMCO (and most likely many Ghanaians firm’s) in handling its working capital management may be convenient and most feasible, giving the constraints. They nevertheless fall short of the superior and dynamic models whose application guarantee efficiency.
b. The working capital management practices used by GHUMCO, Takoradi may provide the desired practical results, but proper level of efficiency may be its casualty.
c. Management should count the positive contribution of mathematical models to the efficient running of the firm and attempt their limited use at least. No unique condition or local constraints should make this unattainable.
5.3 RECOMMENDATIONS
Following the thorough analysis of the firm’s working capital management, the following suggestions are proposed:
i. Cash discount could be employed to reduce the average collection period and improve cash position.
ii. Inventory management need to incorporate some mathematical analysis to overcome problems with material planning and procurement.
iii. The firm’s has to be very cautious in the continuous use of short-term loans for short-term purposes. To sustain this situations, it requires a very aggressive sales and tight control of expenses to increase operational income and profitability
Reference
1. ACCA Study Text, Managerial Finance (2005) London. BPP Publishers
2. Block and Hirt, Foundation of Financial Management (1997), 8th Edition, Michael W. Junior Publishers
3. Ross, Westfield and Jordan, Essentials of Corporate Finance (2004) 4th Edition, McGraw – Hill Publisher
4. Schall and Haley, Introduction to Financial Management (1991) 6th Edition, McGraw – Hill Publisher
5. Van Horne C. James, Financial Management and Policy. International Edition 1995, Prentice Hall Int. Publishes
6. Weston and Brigham, Essentials of Managerial Finance (1990) 9th Edition, the Dryden Press Publishers
7. Weston and Copeland, Managerial Finance (1989) 8th Edition, Dryden Press Publishers
8. www.studyfinace.com
9. www.wikipedia.org/wiki/Working_capital
APPENDIX
QUESTIONAIRE
TOPIC: WORKING CAPITAL MANAGEMENT AT GHANA HOUSEHOLD UTILITIES MANUFACTURING COMPANY LIMITED (GHUMCO) TAKORADI
Dear sir/ madam
This questionnaire is an attempt to investigate into the topic mentioned above. Information gathered will remain strictly confidential. No part will be passed on to any organisation or individual. It is purely for academic work only.
Thank you for your cooperation
PLEASE THICK [ ] WHERE APPLICABLE
A. MANAGEMENT OF INVENTORY
1. What is the composition of your inventory?
a. Raw material [ ]
b. Working-in-progress [ ]
c. Finished Goods [ ]
2. Sources of raw materials
a. Local [ ]
b. Foreign [ ]
c. Both [ ]
3. What is the nature of demand facing the company?
a. Stable [ ]
b. Seasonal [ ]
c. Others (specify)………………………………………………………………..
B. SECURITIES
4. a. Does investment in securities form part of your liquid asset?
Yes [ ] No [ ]
b. If yes, how are they managed? ………………………………………………………………………………………………….
c. If no, give reasons……………………………………………………………………
C. ACCOUNTS RECEIVABLE
5. What is your normal pattern of sales in percentage?
a. Cash sales (%)………………………………………………………………….
b. Credit sales (%)…………………………………………………………………
6. Has your company got a credit policy?
Yes [ ] No [ ]
7. If yes, complete the following:
i. Credit period……………………………………………………………………..
ii. Discount period………………………………………………………………….
iii. Cash discount……………………………………………………………………
8. a. Do you undertake formal credit investigation before granting credit?………………………………………………………………………………………..
b. Give reasons for you answer…………………………………………………….
9. When is a receivable considered as a bad debt?…………………………….
D. LIQUIDITY MANAGEMENT (CASH)
10. How does the company handle its temporary surplus cash?
iv. Holds it safe for future use [ ]
v. Holds in current account with the bank [ ]
vi. Invests [ ]
vii. Others (specify)………………………………………………………………………
………………………………………………………………………………………..
11. Give reason for your answer for question (1)……………………………………………………………………………………………..
………………………………………………………………………………………………….
12. How do you cater for the risk of running short of funds?…………………..
…………………………………………………………………………………………………
13. a. Does the company prepare cash budget? Yes [ ] No [ ]
b. If yes how often is it revised in the course of the year? ………………..
…………………………………………………………………………………………………
c. If no give reason(s)…………………………………………………………………
…………………………………………………………………………………………………
E.CURRENT LIABILITIES
1. What do you use your short-term loan for?
a. [ ] short – term needs
b. [ ] long-term investments
2. Which short-term loan sources do you value most? …………………………………………………..
3. a. Do you consider bank credit as a problem in your short-term loan source?
Yes [ ] No [ ]
b. Give reasons for your answer……………………………………………………………
……………………………………………………………………………………………………………………………………………………………………………………………………………………..
