Impact of effective management of current assets on profitability in manufacturing industries.
1.1 BACKGROUND OF THE STUDY
Many industry have folded up because of insolvency, which is precipitated by poor management of their current assets.
The management of current assets is similar to that of fixed assets in the sense that in both cases a firm analyses their effects on its return and risk. The management of fixed assets and current assets, however, differs, in three important ways:
First in managing fixed assets, time is a very important factor, consequently, discounting and compounding role in capital budgeting and a minor one in the management of current assets.
Second, the large holding of current assets, especially cash strengthens the firm’s liquidity position (and reduces riskiness), but also reduces the overall profitability. Thus, a risk return trade off is involved in holding current assets. Third, levels of fixed assets as well as current assets depend upon expected sales, but it is only current assets, which can be adjusted with sales fluctuations in the short run.
The management of current assets is another aspect of financial management that is very crucial to any industry.
Every establishment, be it public sector or sole proprietor finds it necessary to prepare effective ways of managing it’s current assets to avoid insolvency.
The financial management of the firm may be interpreted as being essentially concerned with the problem of control and with using accounting data to establish standards of performance and monitor results. It is a measure of good management of current asset and degree of solvency of a business enterprise.
According to chukwu (2004:144)” current asset are those assets which are acquired with the intention of converting them into cash during the normal course of business operations”. They include cash and bank balances, stock of goods debtors, bills receivable, prepayments etc. alternatively, current asset is an asset that is not intended for use on a continuing basis in the company’s activities. It is an asset that has been acquired with the intention of sale, or conversion into cash, within a relatively short space of time, usually less than twelve months or one year, but it may be longer for businesses having operating cycle in excess of one year.
The term operating cycle means the average time period between the purchase of merchandise and the conversion of this merchandise into cash. The series of transactions comprising a complete cycle often runs as follows:
- Purchase of merchandise
- Sale of the merchandise on credit
- Collection of the account receivable from the customer.
The management of current asset is often very problematic. This is because it is that variable in the asset of the business that is not constant.
That is to say, it changes in form cash, to inventories, to receivable and then cash. Thus the amount of asset that has to be held as current assets and the form in which they are to be held constitutes some of the decisions that financial manager has to make. If a lost of finds are tied down in the form of problem to management, as the firm will be starved of finds to be used in other productive sectors.
Current asset represent the purchasing power that is currently available to the business manager.
On the other hands, if two little funds are held as current assets, the firm may loose it’s competitive position in the market. This is because the revenue and the profitability of the firm’s generated from the current assets.
Over the years Ebonyi state building materials has through it is wise to embark on the proper management of various components of current asset itemized above. The management of current asset can be said to involve the act of financial management embarrassment and possible liquidation.
In this sense, the management of current asset is central to profitability, for it is concerned with the control of the finance committed to supporting current trends of operations. The control of current is equally centrally important for the financial stability and solvency of a business enterprises. Thus the failure to control the level of available funds may rapidly produce a situation in which the firm could be made insolvent by its inability to meet its debt. Thus the term of the this study is to delve into the usefulness of efficient management of current on profitability despite the fact that the business has being able to meet up with its financial commitment to date.
This study could be of assistance to sole traders, partnership, limited liability companies and the like.
1.1 Statement of the Problem
Many managers, who are ignorant of the usefulness of the current asset believe that the presence of profit in their financial statement is a yardstick for the measurement of sound and good management of the business. Many business have being forced into taking decision which they should not have taken originally if they were in a position to meet up with their immediate financial commitment.
Therefore, poor management of current assets has resulted in the following:
- Low level of investment in current assets
- Inability to finance current assets
- Mismanagement of current assets
Objective of the Study
- To identify the need for investment in current asset on profitability in manufacturing industry.
- To determine whether financing of current asset leads to profitability in manufacturing industry.
- To determine whether proper decision making on the effective management of current asset on profitability in manufacturing industry lead to standard productivity of building material in Ebonyi state.
1.4 Research Question
- Is there any need for investment in current asset on profitability in manufacturing industry?
- Does financing of current assets lead to profitability in manufacturing industry?
- Can proper decision making on the effective management of current asset on profitability in manufacturing industry leads to standard productivity of building materials in Ebonyi State?
1.5 Research Hypothesis
Ho: There is no need for investment in current asset on profitability in manufacturing industry.
H1: There is need for investment in current asset on profitability in manufacturing industry.
Ho: Financing of current asset does not lead to profitability in manufacturing industry.
H1: Financing of current assets lead to profitability in manufacturing industry
Ho: Proper decision making on the effective management of current asset manufacturing industry does not leads to standard productivity of building material in Ebonyi State.
H1: Proper decision making on the effective management of current asset in manufacturing industry lead to standard productivity of building material in Ebonyi State.
1.6 Significance of the Study
The majority of business that thrown into obvious should appreciate the significance of current asset. Some of the significance of the current assets to the manufacturing industry are as follows:
- It will help to know why excessive and inadequate investment of current assets impairs the profitability of manufacturing industry.
- It will help management to know reasons for financing current asset on profitability.
- It will help management to effectively and efficient manage current assets in decision making process.
1.7 Scope and Limitation of the Study
The study will cover the identification of the impact of managing current assets on profitability in manufacturing industry.
It will also examine inadequate and excessive investment in current assets by management industry. It will equally disclose the general contribution of current asset. Because of the time constraint this study is limited to Ebonyi state building material Ezzamgbo Ltd and more importantly to the component of current asset which the company considers relatively important to effective management of current assets.
1.8 Definition of Terms
In order to enable the reader have full understanding of this work, the following terms that are technical and could be interpreted in several ways by different readers have been defined in the context of their usage.
- Current asset: These are circulating asset of the business e.g. cash, debtors, prepayment, government bonds, and other marketable securities, receivables, and investors that will be converted to cash or used within the year or for a short period of time usually a year.
- Working capital: Excess of current assets over current liabilities.
- Capital: Wealth owned by an individual or business organization in the form of money or goals, which is to be used for creation of additional wealth.
- Fixed assets: These are assets which are tangible in nature and can last with a person or business entity for a very long time. There are usually acquired for retention in the business and not for conversion into cash. They include, motor vehicles, plant and land, furniture, fixtures and fitting etc.
- IDLE funds: Fund which cannot be used in production and not used to earn interest dividend.
- Marketable securities: they are short-term securities which can be ready converted into cash.
- Inventories: Inventories are stock of the product a company is manufacturing for sales and components that make up the product.
- Solvency: Ability to meet up with immediate liabilities.
- Liquidity: Availability of cash or near cash assets.
- Assets: The resources owned by the business used in running the business.
- Insolvent: Inability to meet up with immediate liabilities.
- Management: The act of getting things done through people especially business management involves setting company goals and directing human and physical resources to achieve these set goals.
- Effective: Producing the result that is wanted or intended. It also means producing a successful result.
- Investment: Investment refers to the action of deploying funds with the intention and expectation that they will earn a return for their owners. It could also be buying or putting in money for higher yield.