EVALUATING THE IMPACT OF RISK MANAGEMENT ON PERFORMANCE OF MANUFACTURING FIRMS IN NIGERIA

ABSTRACT

This study focused on investigating the impact of risk management on performance of firms in manufacturing sector in Nigeria within the period of 2007 to 2015. This study was carried out to investigate the impact of working capital management and investment capital management on firm’s performance in the manufacturing sector in Nigeria and to also ascertain which of working capital or investment capital is managed more, using working capital and investment capital as proxies for risk management while using return on asset and return on equity as proxies for performance.

Secondary data were collected from the publicly available audited financial statement of the companies selected. Ordinary least Squares Regression was adopted in testing the relationship between risk management and performance of the seven companies respectively while descriptive analysis was done with the use of graph in analyzing changes in the variables over time.

The result from the ordinary least squares (OLS) regression analysis showed that four of the seven companies have significant relationship between investment capital and return on asset while three have significant relationship between working capital and return on asset, and on the other hand there was significant relationship between investment capital management and return on equity of three companies while the other four have no significant relationship between working capital and return on equity.

The study therefore concluded that risk management have impact on performance of firms in the manufacturing sector and also that firms in the manufacturing sector tend to manage their investment capital more than their working capital.

Keywords: Risk, Risk management, Working capital, Investment capital and Performance

CHAPTER ONE

INTRODUCTION

1.1     Background to the Study

Risk may be defined as the probability of occurrence of an adverse event. Risk refers to the uncertainty that surrounds forthcoming events and outcomes. It is the expression of the likelihood and impact of an event with the potential to affect the achievement of an organization’s goals (Heinz, 2010). Risk can be seen as a state where there is a likelihood of a loss but also a hope of gain (Emma & Gabriel 2012). The term risk can also be defined and elucidated in many different ways depending on the aim and perspective of a discussion. Kaplan and Garrick (1981) stated that a risk is a doubt joint with damage or a loss. They mean that something that is indeterminate does not have to incur a risk; however, if an event is considered as both indeterminate and a loss is included, it can be defined as a risk. The Society for Risk Analysis (2012), defines as “The potential for realization of unwelcome, adverse consequences to human life, health, property, or the environment”.Since one would never jeopardize the loss if there were no chance of a win. To realize the existence of a risk, one must be aware of both the gains and losses incurred and therefore a risk can be reflected as individual and relative to the observer (Kaplan & Garrick, 1981). All these definitions seek to make known that risk is to be seen as part of daily life, and the presence of risk in any environment should not be a problem but the focus should be on how those risks are being managed and in turn minimizing their potential effect.

Risk management on the other hand deals with the process of identifying and controlling potential risks that can be faced by an organization. Risk management is about identifying the risk to be managed, risk to leave unattended and risk that need to be hedged. Risk management is recognized in today’s business world as an integral part of good management practice. In its broadest sense, it entails the systematic use of management policies, procedures and practices to the tasks of identifying, analyzing, assessing, treating and monitoring risk. Risk management refers to a practice of identifying loss exposures faced by an organization and selecting the most appropriate procedures for treating these particular spotlights effectively (Rejda, 2003). Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to mitigate, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities (Wenk, 2005).

Effective risk management can bring far payoffs to the company irrespective of what type it is. These paybacks include, superior financial performance, better basis for strategy setting, improved service delivery, better competitive advantage, less time spent firefighting and fewer unwanted surprises, increased likelihood of change initiative being achieved, closer internal focus on doing the right things properly, more efficient use of resources, reduced waste and fraud, and better value for money, improved innovation and better management of contingent and maintenance activities (Wenk, 2005). Risk management in manufacturing sector is about the categories and types of risks that can be opened to companies in the manufacturing industries and the approach which the companies adopt in managing those risks. The ways and manners which companies adopt in managing their risks can have either of positive or negative effect on their performance. Here are some of the risks that manufacturing companies can be exposed to; environmental risk, reputational risk, technological risk, and legal risk.