CHAPTER ONE
INTRODUCTION
One of the major objectives of most business organization is profitability. However, in financial management, it is generally believed that liquidity is more important than profitability. One of the reasons for this is that most organizations make profits, but do not possess enough or adequate liquid asset to offset current obligations. Inability to make payment as at when due may definitely have serious consequences on the organization. This situation may give rise to a loss of goodwill and furthermore any result to technical insolvency, which may lead the organization to unintended liquidation. A second reason is hat uncertain inherent in these present days economic/business environment threatens the survival of every business, thus making sound liquidity and cash management a necessity points in corporate planning. This claim is substantiated in the recent times by the fact that the importance of management of liquid asset has been gradually and systematically gaining prominence and growth of liquidity management makes it very apparent that no firm can survive without an effective and efficient management of its liquid resources which is the working capital. The working by all standards is been and regarded as the life-wire of any business organization it is particularly important in the daily maintenance and running expenses involving cash for the purpose of this project, the working capital of a firm comprises of the cash balance marketable short-term securities, inventories and accounts receivables. On the other hand, net working capital is the excess of current assets over current liabilities.
Therefore, working capital management refers to the efficient administration of the current assets and current liabilities. The rationale of working capital management is on the realization that current asset holding should be increased to the point where marginal returns or increases in such assets are equal to cost of capital required to finance such additions while current liabilities should as much as possible be used instead of long term debt whenever this reduces the average cost of capital. Current assets characteristically constitute more than half the assets of most business and the size and relative volatility of these assets make it necessary for such assets to be closely monitored. Thus disproportionate amount of time of the financial controller is devoted to the management of working capital. Finally, efficient management of working capital is important to both large and small firms, especially during this austere period because if the efficiency of managing working capital is not available, no amount of finance provided will transform a financially weak organization performance into a strong and dynamic organization with a remarkable reputation.
STATEMENT OF THE PROBLEM
It has been recognized that one of the greatest problem of this present day firms is the lack of effective and efficient management of the resources at their disposal. This problem is worsened considering the present fiscal policy of banning the importation of some essential raw materials; leaving the manufacturing firms with meager source of locally few produced raw materials. Decisions effecting liquid assets are influenced by an obvious fact and subjective judgment of most companies. The financial controller of a company may have some of the facts of the cost of borrowing from a bank but these fact are only part of the information that he requires. On the other hand, there are also subjective benefits arising from having more cash. the financial manager may decide to buy some insurance against financial liquidity by arranging and paying for a credit agreement committing a bank to end up to an agreed sum. Despite all these explicit and implicit costs , still in profits liquid assets may not mean storage in profits. According to spacers (1977) “profits may appears satisfactory while operations are claiming financial resources of the business”. Still in the same view, Harthey (1985) said that “profitable firms have been known to the have a considerable cash surplus”. On this note, the problem is to identify the difficulties many manufacturing firms finds themselves in when they perceive that profit mature to the detriment of running illiquid. This will go a long way to identify the relationship existing between the management of working capital.
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