EMPIRICAL EXAMINATION OF THE ASSOCIATION OF WORKING CAPITAL MANAGEMENT AND FIRMS’ PROFITABILITY OF THE LISTED FOOD AND BEVERAGES FIRMS IN NIGERIA

Abstract

INTRODUCTION:Food and Beverages Sector is undoubtedly among the most vibrant sectors that contribute significantly to the economy growth and development of the Nigerian economy. It is the third after Oil and service Industries contributing to about 17.72%, 18.21% and 19.10% in the first, second and third quarter in 2014, which is approximately contributing about 20% to GDP of the country, (National Bureau of Statistics, 2014). As an important sector in the overall economy growth, Food and Beverages requires in depth analysis both at industrial as well as at firm level.Working capital also known as circulating capital or revolving capital is that organizational capital which is used to invest in the current assets as well as settlement of current liabilities. A healthier working capital explains that the corporation is in a sound financial condition capable of subduing its short-term obligations. On the other hand, a negative working capital is where the most liquid assets of the corporation are not sufficient to fulfill its current monetary commitments. It is evidently and crystal clear that the prime responsibility of financial managers is to ensure efficacy, efficiency and or judiciously utilizations of the available meager wherewithal at the company's disposal. A well-managed working capital promotes a company's well -being in the market in terms of liquidity and it also acts in favor for the growth of shareholders value (Jeng-Ren, Li & Han-Wen, 2006).The central intent of running corporate outfits is mostly to make a positive return on investment. However, it is generally accepted that ample liquidity is of paramount importance when it comes to the issue of corporate survival and growth. For all countries, both developed and developing, one of the fundamental objectives of working capital management is to ensure that the organization has sufficient, regular and consistent cash flow to fund its activities. The way that working capital is managed has a significant impact on profitability and cash holdings of firms (Deloof, 2003). Undoubtedly, efficient working capital management is associated with lots of advantages amongst which include but not limited to speedy payment of short term commitments on firms (Peel and Wilson, 2000); facilitates owner financing; reduces working capital as a cause of failure among small businesses (Berryman, 1983); ensures a sound liquidity for assurance of long term economic growth and attainment of profit generating process (Wignaraja and O'Neil ,1999); and ensures acceptable relationship between the components of firms working capital for efficient mix which guarantee capital adequacy, (Osisioma, 1997). On the other hand, inefficient working capital management leads to abysmal failures of many corporate organizations. This might not be unconnected to the fact that fund management is sine qua nonn to organizations' prosperity (Berryman, 1983), overtrading signs (Appuhami, 2008), and inability to propel firm liquidity and profitability, (Eljielly, 2004; Peel and Wilson, 1996; Shin and Soenen, 1998).From accessible data one can authoritatively state that there are many studies been conducted on this area but there have been no consensus as to whether or not working capital management effect organizational profitability negatively or positively. There was myriad of results some showing positive relationships others negative. For instance, the works of Hina Aqha, Alipour, Rahman all test the effect of working capital and profitability and find out that there is positive relationship, Tharshiga (2013) report a negative relationship and other studies like that of Erik (2012), Benjamin and Samuel (2010) did not show any relationship while the work of Daniel and Ambrose (2013) found a positive relationship between profitability and account receivable and cash conversion cycle and a negative relationship between profitability and inventory and account payable. So because of disharmony among various researchers and for the facts that few other researches we were able to lead hands on uses manufacturing companies, textile industries, pharmaceutical companies we did not come across any that use food and beverages and of course food and beverages is one of the most contributory company in the case of Nigerian Capital Market. …