THE ROLE OF WORKING CAPITAL MANAGEMENT IN PRIVATE SECTOR ESTABLISHMENTS

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND OF THE STUDY

The sole objectives of any business in the private sector are to make profit but the uncertainty inherent in today’s economic environment threatens the survival of every business and makes sound liquidity and cash management. The local point for financial management rather than achievement of maximum profit, for sometime past the convention revenue accounts and balance sheet have been considered sufficient for the effective control of a business. The deeper study and increased analytical approach to business finance has red to an ever growing realization of the importance of working capital and its influence on the success or other wise of business operation.

Working capital management is concerned with the management of the various elements of working capital, which includes stocks, debtors, cash and creditors other components of working capital include short term securities, bills payable, prepayments and other current assets. However, working capital management has been variously defined but in a nutshell. It refers directly to planning organizing, financing and controlling of resource available to the business in order to achieve set of objectives or a definite goal.

L.R Howard put it this way; working capital may be regarded as the lifeblood of a business. Its effective provision can do much to ensure the success of a business, while its inefficient management can lead not only to the loss of profit but also to the ultimate down fall of what other wise might be considered as a promissory concern. It is certain that if skilled working capital management is not available in amount of finance provided will transform a financially weak company with mediocre performance into a strong and dynamic organization enjoying a scintillating regulation. This research work is a crucial one in the sense that current asset by their very nature are changing daily if not hourly and management decision must be made.

1.2 STATEMENT OF THE PROBLEM

The management of inter-relationship existing between current assets and liabilities has been the primary problem of working capital management. Effective working capital management involves sourcing of fund for the management daily operations of the companies. Every company needs to maintain a satisfactory level of working capital or it would go into bankruptcy and finally wound up. However, profitability, liquidity and other related risks have been a major problem facing companies in private sector.

This is an important characteristic of working capital management. Maintaining a large size of positive side of the economy, but profitability would be adversely affected, as fund remains ideal. Conversely, if company’s holding asset are relatively small, the overall profitability will not doubt increase, but this will have an adverse effect on the company’s overall performance, including its liquidity position and thus, making the company more risky. Working capital management should therefore aim at striking a balance between the liquidity and profitability positions.